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Investors Flock to Treasuries as Yields Drop to Lowest Since '12

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(Bloomberg) -- Treasuries surged, pushing yields to the lowest in more than three years, as a persistent rout in global financial markets pushed investors into the safest assets.

Benchmark 10-year notes rallied for the sixth day as commodities tumbled and investors dumped equities worldwide. Concern that central banks have lost the power to shield a global economy from slowing growth and anemic inflation has lifted Treasuries to a 4.1% gain in 2016.

"It's been a traumatic rally," Ian Lyngen, a government- bond strategist at CRT Capital Group in Stamford, Conn. "To a large extent the market is in a panic mode. The Treasury market is simply a residual market of what's going on in other asset classes, primarily equities and oil, and for that reason it's not trading off its own fundamentals."

Federal Reserve Chair Janet Yellen added fuel to this year's bond rally by suggesting on Wednesday that the central bank may delay raising interest rates as recent market volatility has tightened financial conditions. She will conclude a two-day appearance before U.S. lawmakers Thursday in Washington.

The benchmark Treasury 10-year yield dropped six basis points, or 0.06 percentage point, to 1.61% as of 9:34 a.m. in New York, according to Bloomberg Bond Trader data. It touched 1.53%, the lowest since August 2012, a month after it fell to a record 1.379%. The price of the 1.625% security due in February 2026 rose 18/32, or $5.63 per $1,000 face amount, to 100 1/8.

The futures market is assigning a higher probability to a Fed interest-rate cut than to an increase by the end of this 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.

Crude oil prices fell for a sixth day as a bond-market gauge of inflation expectations tumbled to the lowest in almost seven years.

"This is a perfect storm for a U.S. Treasury holder that keeps driving down yields in this flight-to-quality environment," said London-based David Schnautz, a director of rates strategy at Commerzbank. "Everyone we speak to views that the glass is half empty. That filters through into all types of markets -- with the first choice of demand U.S. Treasuries."

The U.S. will sell $15 billion of 30-year bonds as pre- auction trading suggests the securities may yield the least in more than a year. The U.S. sold $23 billion of 10-year notes Wednesday at the lowest yield since December 2012.

With assistance from Wes Goodman and Eshe Nelson.

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