Treasuries extend best start to year since the financial crisis

[NEW YORK] Treasuries advanced for a fourth week in five, extending their best start to a year since the financial crisis, as slowing growth in US services and tumbling commodity prices left traders doubting whether the Federal Reserve will raise rates this year.

Yields rose early Friday after a Labour Department report showed wages increased more than forecast in January, before longer-dated government debt erased losses. A bond-market gauge of inflation expectations known as the 10-year break-even rate still fell to the lowest since 2009. Earlier in the week a report showed US service industries expanded in January at the slowest pace since 2014, dimming the outlook for growth.

Tumbling global stock prices and oil near 12-year lows have sparked investors to seek the safety of government debt and spurred Treasuries to a 2.8 per cent gain this year, the most since 2008. Benchmark 10-year note yields touched a one-year low this week as economists and traders doubted whether the Fed will be able to carry out the four rate hikes that policy makers have targeted for 2016.

"The market is still all about flight to quality and negative rates abroad and to buy Treasuries, to buy Treasuries, and to buy Treasuries," said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 22 primary dealers obligated to bid at US debt sales. The outlook for the Fed is "still a very confusing picture for people. People just aren't taking risk." Yields on the two-year note, the coupon security most sensitive to Fed policy expectations, fell five basis points this week to 0.72 per cent. Benchmark 10-year note yields fell nine basis points to 1.84 per cent.

Futures traders see a 53 per cent chance the Fed will lift its target this year after raising rates in December for the first time in nearly a decade. That's down from a 93 per cent probability assigned at the end of last year. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

The Fed's favored inflation measure - known as the personal consumption expenditures index, or PCE - hasn't reached the central bank's 2 percent target since 2012.

"It's range trade for Treasuries still this year," with 10-year yields trading between about 1.5 per cent and 2.5 per cent, said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co in New York. "It's still going to be a difficult climb for the Fed to get that PCE inflation up to 2 per cent. That's a real hurdle and seems unlikely."

BLOOMBERG