Treasury Volatility Drops Before Fed Amid Rate-Path Skepticism

  • Price-swing gauge declines for longest stretch since November
  • `The market is expecting the Fed’s going to be dovish today'

Bond-market volatility has declined for four straight days, the longest stretch since November, as investors piled into bets the Federal Reserve won’t raise borrowing costs anytime soon.

Treasury yields rose from levels close to the lowest this month as the Fed prepares to release its policy statement Wednesday afternoon. Five-year notes declined as the U.S. sold $35 billion of the securities.

The muted bond-price swings come as investors question the central bank’s ability to tighten policy as volatility in equities and plunging commodity values stoke concern that global growth is slowing. Futures traders are pricing in about one Fed rate increase this year, compared with four indicated by officials’ median projection at their December meeting. Speculators in the world’s most actively traded money-market futures retreated from wagers that the Fed will raise rates after liftoff from near zero last month.

"With rates where they are, the market is expecting the Fed’s going to be dovish today," said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that trade with the central bank. "It’s a global risk-off environment. Those factors argue for fewer than the four rate hikes expressed."

The 10-year note yield rose for the first time in three days, gaining five basis points, or 0.05 percentage point, to 2.05 percent as of 1:12 p.m. New York time, according to Bloomberg Bond Trader data. The price on the 2.25 percent security due in November 2025 fell about 15/32, or $4.69 per $1,000 face amount, to 101 25/32.

The Bank of America Merrill Lynch MOVE index of Treasury price swings fell to 75.16 Tuesday. The four-day decline is the longest stretch since Nov. 16.

The market-implied probability the Fed will raise its policy rate at or before its June gathering is at 50 percent, down from about 75 percent at the end of last year, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase. Traders assign a zero percent chance to an increase Wednesday.

The five-year note auction drew a yield of 1.496 percent, higher than the 1.486 percent yield forecast in a Bloomberg News survey of six primary dealers. Primary dealers, which are obligated to bid at Treasury auctions, received 37.8 percent of the securities, the most at a sale of the notes since August.

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