Treasuries Climb as Fed Says Rates Likely to Remain Low

Treasuries rose, pushing 10-year yields to a two-week low, as the Federal Reserve reiterated that it’s likely to keep the benchmark interest rate close to zero for a “considerable time” after bond purchases end.

Benchmark 10-year notes rose even as the central bank reduced the monthly pace of its bond-buying by $10 billion, to $45 billion, the fourth cut of that size since policy makers said in December they would taper the stimulus program. The Fed said in a statement further decreases are likely in “measured steps.” Treasuries rose earlier after a report showed first-quarter U.S. economic growth slowed more than forecast.

“The Fed delivered on expectation in every conceivable way,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “Those who thought the Fed would be more concerned about the earlier weakness in the year are disappointed.”

The 10-year note yield dropped five basis points, or 0.05 percentage point, to 2.65 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 2.64 percent, the lowest level since April 17. The price of the 2.75 percent security due in February 2024 climbed 3/8, or $3.75 per $1,000 face amount, to 100 7/8.

Thirty-year bond yields decreased three basis points to 3.46 percent.

Bonds Rally

Long-bonds (USGG30YR) rallied for a fourth month in April, the longest stretch of gains since September 2009, a period during the financial crisis when the economy lost an average 309,000 jobs per month. Ten-year notes rose this month for the first time since January.

The Bloomberg U.S. Treasury Bond Index (BUSY) returned 0.4 percent this month through yesterday and 2.2 percent this year, after losing 3.4 percent last year. U.S. government securities gained as harsh winter weather slowed economic growth and unrest between Russia and Ukraine fueled demand for safety.

Yields increased after the Fed’s March 19 meeting when Fed Chair Janet Yellen suggested policy makers might begin raising interest rates by the middle of next year. Subsequent statements by policy makers and Yellen led investors to revise those expectations. The central bank has a “continuing commitment” to support the recovery even as policy makers see full employment by late 2016, she said in a speech April 16.

Rate Bets

Futures prices put the likelihood the Fed will start raising borrowing costs by its April 2015 at 34 percent, compared with 40 percent yesterday, based on trading today before the Fed announcement on the CME Group Inc.’s exchange. The chances of a Fed increase are 47 percent by its June 2015 meeting and 68 percent by its July 2015 meeting, the data show.

The Federal Open Market Committee maintained its key interest-rate target today at zero to 0.25 percent, where it has been since December 2008. Policy makers kept their forward guidance on borrowing costs, saying in a statement they’ll consider a “wide range of information” in deciding when to raise the benchmark federal funds rate, the cost of overnight loans among banks.

“The statement leaves the market very susceptible to shifts in rate expectations,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Every time we have a data point, the bond market will try to determine what it means through the eyes of the Fed, and that means more volatility, especially in the front end of the curve.”

Bond Purchases

The Fed said its monthly bond purchases will now be divided between $25 billion in Treasuries and $20 billion in mortgage debt. The number of Treasury acquisitions will be reduced “for operational efficiency,” the Fed Bank of New York, which conducts the operations, said in a statement. Sixteen purchases of Treasuries are planned for May, versus 18 in April, schedules showed.

The Treasury said earlier it will auction $29 billion in three-year notes on May 6, $24 billion in 10-year notes on May 7 and $16 billion in 30-year bonds on May 8, according to a statement. The department said auctions of notes and bonds are down from $70 billion last quarter. The sales will raise $9.7 billion in new cash.

The size of two- and three-year note auctions will be reduced as a shrinking budget deficit gives the government scope to reduce borrowing, the department said. Three-year sales will fall to $27 billion by July, from the current level of $30 billion, a Treasury official told reporters in Washington. Auctions of two-year notes will decline to $29 billion by July, from $32 billion, the official said.

U.S. GDP

U.S. gross domestic product expanded at a 0.1 percent annualized rate from January through March after rising at a 2.6 percent pace in the previous three months. The median forecast of 83 economists surveyed by Bloomberg called for a 1.2 percent increase.

U.S. companies boosted payrolls by 220,000 in April, figures from the ADP Research Institute in Roseland, New Jersey, showed. The median forecast of 45 economists surveyed by Bloomberg called for an advance of 210,000.

“The economy could stay up this year,” David Rolley, who co-manages $36 billion as vice president of the global fixed-income group at Loomis Sayles & Co., said at a press event in New York. “There’s a wall of skepticism after four years of broken promises about the economy growing faster, but we think it could happen.”

With growth of about 3.5 percent in the second half of the year, the 10-year yield should increase to 3 percent or more, Rolley said.

Employment Report

The unemployment rate dropped to 6.6 percent this month, matching the lowest level since January 2008, economists surveyed by Bloomberg forecast before the Labor Department reports the data May 2. A separate survey projected the U.S. added 215,000 jobs in April, the most since February 2013.

Wells Fargo, the largest U.S. home lender, reduced its targets for the year-end yields of 10- and 30-year Treasuries, citing continued low inflation and a rising flow of money into bond mutual funds.

The bank lowered its forecast for 10-year note yields to 3.25 percent from 3.5 percent and cut projections for the 30-year bond yield to 4 percent from 4.5 percent, Brian Rehling, chief fixed-income strategist, said yesterday in a note to clients.

A Bloomberg survey of analysts predicts the 10-year yield will be at 3.37 percent at year-end, and the 30-year bond will yield 4.13 percent.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey

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