Futures traders cut the probability to 24% from 34% that the Fed will raise interest rates at its September meeting.
Treasuries are proving to be investors' main destination in a global scramble for safety, pushing 10-year yields below 2% for the first time in four months.
U.S. government debt outpaced the bonds of other major economies as concern that the global economy is slowing sent stocks tumbling and investors seeking shelter. Traders trimmed wagers that the Federal Reserve will raise interest rates this year, and a bond-market gauge of inflation expectations touched the lowest since August 2010.
The rally in Treasuries extended an advance from last week, when investors saw the value of their U.S. government-debt holdings soar by $67 billion, the most since early July, according to Bank of America Merrill Lynch bond indexes.
“For global investors with large amounts of money seeking a safe haven, it's Treasuries, Treasuries and Treasuries,” said James Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds, which oversees $228 billion in Menomonee Falls, Wis. “I can't think of anything else.”
The benchmark U.S. 10-year note yield fell six basis points, or 0.06 percentage point, to 1.98% as of 10:31 a.m. New York time, according to Bloomberg Bond Trader data. That's the lowest since April. The 2% security due in August 2025 rose about 1/2, or $5 per $1,000 face amount, to 100 3/16.
European stocks extended a rout that began in Asia, when Chinese equities tumbled the most since 2007. The Bloomberg Commodity Index, which tracks 22 raw materials, fell to the lowest since August 1999.
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Futures traders cut the probability to 24% that the Fed will raise interest rates at its September meeting, from 34% on Aug. 21. The chance of a December increase fell to 46% from 61%. The figures are based on the assumption that the effective fed funds rate will average 0.375% after the first increase.
“The story isn't: 'Is the Fed going to go?' It's: 'Is the world falling apart?'” said Thomas Roth, a senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We haven't had a move in stocks like this in a long time, and it's a free-for-all. That drives a bid to the safety of Treasuries.”
As 10-year Treasuries rallied, the extra yield on the bonds relative to the average for the other Group of Seven economies fell to 0.86 of a percentage point, the smallest spread since February, according to data compiled by Bloomberg.
Sliding inflation expectations may delay the Fed because the central bank has a long-term target of about 2%. Inflation that's too low can slow economic growth by keeping wages low and discouraging spending.
The extra yield on benchmark 10-year notes over that on inflation-linked debt shrank to as little as 1.48 percentage points, the least since August 2010.
Investors have added cash to U.S.-domiciled government-bond funds for seven straight weeks, according to an Aug. 20 note from Bank of America Merrill Lynch. They yanked $8.3 billion from stock funds last week, the most in 15 weeks, the bank found.
