U.S. Treasury prices rose sharply on Thursday, with long-dated yields plunging to record lows as worries over global economic growth and the effectiveness of central bank policy fueled demand for safe haven assets.
With stock prices down, oil prices falling towards 12-year lows hit last month, and European bank stocks slumping to new multi-year lows, investors increasingly supported the view that the Federal Reserve will not raise interest rates again this year.
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Prices of fed fund futures, which are used to predict future policy decisions by the U.S. Federal Reserve, surged as investors further cut expectations that the central bank can engineer another rate hike soon.
Short-term rate futures, a proxy for expectations for the Fed, now show the market sees no chance of a rate increase this year.
"In our view there is a mini-financial crisis impacting Treasury prices," said Bo Christensen, chief analyst at Danske Invest in Copenhagen, Denmark.
"Part of what you're seeing in the Treasury market is the market telling Yellen that if the Fed continues raising rates it would be a policy error, but we disagree with the market," said Christensen.
The 10-year Treasury note yield dropped to 1.53 percent, its lowest since September 2012, while the 30-year bond yield hit 2.38 percent, its lowest in a year.
The yield spread between 10-year and 2-year notes narrowed to its tightest since November 2007, reflecting an outlook for weak economic growth and low inflation.
"As oil and commodities go to new lows with lower inflation baked into the outlook, you'll get lower rates that will prevent the Fed from moving again," said money market strategist Tom Simons of Jefferies & Co in New York. "The market is pricing out an increase for the rest of the year and even early next year."
The December fed funds futures contract shot to a record high, implying an end-of-year fed funds effective rate of 0.35 percent, compared with 0.38 percent on Wednesday.
The moves came on the second day of testimony to the U.S. Congress by Fed Chair, Janet Yellen.
The benchmark 10-year note was last up 23/32 in price to yield 1.630 percent, down from 1.708 percent late on Wednesday.
The 30-year bond price was up a 1-05/32 in price to yield 2.478 percent, down from 2.529 percent on Wednesday.
The Treasury Department sold $15 billion in 30-year bonds to disappointing demand.
(Reporting by Tariro Mzezewa and Dan Burns; Editing by Chizu Nomiyama and Lisa Von Ahn)