US Treasuries rally as investors scale back rate expectations

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US Treasuries rallied on Tuesday as investors rushed to haven assets following Hamas’s attacks in Israel and comments from Federal Reserve officials who hinted that the US may have reached the end of its rate-rising campaign.

The yield on benchmark 10-year Treasuries dropped 0.14 percentage points to 4.66 per cent, on course for the biggest one-day fall since March, on its reopening after a US public holiday.

“There has been a flight to safety as conflict unfolds in the Middle East,” said Andres Sanchez Balcazar, head of global bonds at Pictet. “It’s quite natural that an exogenous shock like this will generate a rally in US Treasuries.”

The rebound comes after relentless pressure on global sovereign debt prices in recent weeks as investors adjust their expectations that interest rates will stay higher for longer. Benchmark US debt yields hit a 16-year high of 4.88 per cent on Friday following stronger-than-expected jobs data. Bond yields fall when debt prices rise.

It also followed moves on European debt markets on Monday, when German Bund yields — a benchmark for the eurozone — fell 0.11 percentage points to 2.77 per cent. Yields on the Bund were steady on Tuesday.

US government debt also rose after comments by Fed officials on Monday, who signalled that the US may have finished raising interest rates.

Lorie Logan, Dallas Fed president and a notable hawk, said the sharp rise in long-term yields in October could mean less need for further rate increases.

“It seems increasingly likely that the hike from the Fed in July will prove to be the last, although if US growth fails to weaken in the coming months then another hike is definitely not off the table,” said Mike Riddell, a bond fund manager at Allianz Global Investors.

Markets have scaled back bets on a Fed interest rate rise to 14 per cent when it sets policy on November 1, down from a 30 per cent probability after Friday’s payroll data.

Investors are on guard for further volatility in Treasury markets when US markets open. Sanchez Balcazar said there was an “enigma” on the basis trade positioning — where hedge funds sell futures and buy bonds, pocketing gains between the two. “Everyone is waiting for the open on the US to see if there is an unwind of that,” he added.

The rally in Treasuries boosted stock markets, which have fallen sharply as the price of debt becomes more attractive to investors. The Stoxx 600 Europe index rose 1.5 per cent on Tuesday. US futures pointed to a higher open on Wall Street, with contracts tracking the S&P 500 0.2 per cent higher.

Investors will be listening carefully to a number of Fed policymakers scheduled to speak today for signs of future policy.