Treasuries Gain as Political Tumult, Soft Data Cloud Fed Outlook

(Bloomberg) -- Treasuries rose for a second day as U.S. political turmoil sapped investor confidence in the Trump administration amid signs the world’s biggest economy is losing momentum.

Benchmark 10-year yields fell to the lowest in two weeks following reports President Donald Trump asked the FBI director to drop an investigation into a former security adviser and Trump disclosed allegedly classified information to Russian officials. A Bloomberg index of whether U.S. economic data is exceeding or trailing forecasts slid to a three-month low after a report Friday showed core inflation slowed.

“With the shaky investor confidence in the U.S. inflation outlook, political turmoil is seen as a negative” for risk sentiment, said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “Markets have just started to price out future Fed rate hikes and are likely to focus on weak U.S. data from here on.”

Treasuries Gain as Political Tumult, Soft Data Cloud Fed Outlook

Overnight index swaps show there’s a 79 percent chance the Federal Reserve will raise its benchmark rate in June, down from a 96 percent probability on May 11, the day before the inflation data was published.

The Treasury 10-year yield fell three basis points to 2.30 percent after dropping to 2.29 percent, the lowest level since May 3, according to Bloomberg Bond Trader data.

The benchmark yield may fall to 1.75 percent in “autumn,” which would put it back where it was during the U.S. presidential election in November, Sumitomo Mitsui’s Uno said. A decline to that level by the autumn equinox on Sept. 22 would generate a 5.6 percent return for investors who buy Wednesday, according to data compiled by Bloomberg.

Government bonds in the Asia Pacific mostly followed Treasuries higher. Singapore’s 10-year yield dropped five basis points to 2.08 percent, set for its lowest close since Nov. 10.

Australia’s 10-year bond held gains after S&P Global Ratings reaffirmed the nation’s AAA rating. The company kept the outlook negative, saying it reflects risks to the government’s fiscal consolidation plan and to the economic, fiscal and financial stability outlook should rapid growth of credit and house prices continue.

Asia Rates at a Glance

New Zealand2.890-1.88-3.9-0.89
South Korea2.2701.16-3.0-1.07

The table shows 10-year government bond yields and yield changes on the day. Z-scores measure deviation from average in past three months.