Russian Federation continues to increase investments in U.S. Treasuries

Anxiety has been growing over the global economy amid lower commodities prices, plunging emerging-market assets and a selloff in both stocks and bonds sold by lower-rated U.S. companies, known as junk bonds.

“The 10-year note’s yield, a bedrock for global finance, is trading near its lowest level since the end of April”. Solid jobs growth has bolstered the case for the Federal Reserve to start raising interest rates for the first time since 2006. The yield climbed to 0.76 percent on August 5, the highest level since April 2011.

The Treasury yield curve was flatter on Thursday (blue), than a month ago (green) and than a year ago (red).

On Thursday the Treasury Department auctioned $16 billion of five-year Treasury Inflation-Protected Securities (TIPS) to record investor demand, according to Reuters, with participants enticed by the sector’s recent rout.

Using that math, the Fed’s $1.3 trillion of Treasury holdings that come due through the end of the decade may boost 10-year yields by less than 0.3 percentage point.

In oil markets, this week saw U.S. crude hit a new six-and-a-half-year low after falling under $40 a barrel. The spread between two- and 30-year securities dipped for a fourth day after contracting to as little as 208 basis points Monday, the least since April 28, Bloomberg reports.

On Friday, stock markets were in a sea of red, with the Dow Jones Industrial Average DJIA, -3.12% down 286 points and the Russell 2000 RUT, -1.34% down 19 points, or 1.6%, more than 10% below its peak reached on June 23 – which meets a widely-used definition of a correction.

Yields on short-term Treasury debt have risen as they are highly sensitive to changes in the Fed’s interest-rate outlook. The lower inflation makes Treasury bonds more attractive to fixed-income investors as the real yield, or adjusted nominal return to compensate for inflation, has become more attractive.

“The minutes brought into serious question the notion that the Fed is going to lift rates at the September meeting”, said Ian Lyngen, a government bond strategist at CRT Capital Group in Stamford, Conn.

“Other measures paint a less sanguine picture of Treasury market liquidity”, the analysts said.

“Financial markets’ conditions will be much more challenging particularly as the Fed’s September policy meeting approaches”, said Guy Haselmann, head of U.S. interest rate strategy at Bank of Nova Scotia in New York. It has kept its key rate in a range of zero to 0.25 percent since December 2008.

The timing of the U.S. central bank’s first rate hike in nine years has been a constant source of debate in the markets, as traders await the final pieces of economic data the Fed will take to its September rate meeting.