LONDON/SINGAPORE: Treasuries rose, with 10-year notes erasing a drop from a day earlier, as a decline in stocks boosted demand for the safest assets before a US retail sales report that may help give clues about the likelihood of a rate increase by the Federal Reserve.

A report Friday is forecast by economists to show that US retail sales increased by 0.8 per cent in April after declining a month earlier. Traders have pushed back bets on when the Fed will next raise borrowing costs, a perception that has helped bolster a rally in Treasuries this year.

“Weaker Asian equities are supporting Treasuries as risk appetite wanes, with the Fed’s reluctance to raise rates remaining a key support” in the near-term, said Nick Stamenkovic, a rates strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Higher-than-expected US retail sales are unlikely to have a significant adverse impact on Treasuries, given ongoing global disinflation pressures and the yield pickup for Treasuries” over German bunds and Japanese government bonds, he said.

Benchmark Treasury 10-year note yields fell two basis points, or 0.02 percentage point, to 1.73 per cent as of 6.54am. New York time, according to Bloomberg Bond Trader data. The 1.625 per cent security due in May 2026 rose 7/32, or $2.19 per $1,000 face amount, to 99 2/32. The yield increased two basis points Thursday.

German 10-year bund yields were 0.15 per cent, while those on similar-maturity JGBs were minus 0.115 per cent.

Equities Slide

The MSCI Asia Pacific Index of shares dropped 1.3 per cent, while European equities fell for a third day, with the Stoxx Europe 600 Index declining 0.3 per cent, underpinning demand for the relative safety of government debt.

The odds of the Fed raising rates in 2016 have dropped to 53 per cent from more than 90 per cent at the start of the year, according to data based on fed fund futures compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 per cent after the central bank’s next increase.

“Some Fed members tell the market it’s wrong to have with current pricing for rate hikes, but the market has heard it before and doesn’t believe or accept it,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “Treasuries will continue to trade well and the market will still see dip-buying.”