U.S. 10-Year Sale's Lowest Yield Since 2012 May Diminish Demand

Are Negative Rates a Tool in the Fed's Toolbox?
  • Gap between two-, 10-year note yields falls to least since '07
  • Fed chair says market turmoil may alter interest-rate path

Treasury 10-year notes gained, pushing yields to the lowest in a year, as Federal Reserve Chair Janet Yellen stuck to her call for gradual interest-rate increases.

Government bonds are surging this year as turmoil in equity and commodity markets boosts demand for fixed-income assets amid concern that global growth is slowing. Declining inflation expectations have supported longer-dated Treasuries, with the gap between yields on two-year notes and 10-year securities falling below one percentage point to the lowest in more than eight years. An auction of 10-year notes drew the lowest yield since 2012.

Yellen said in remarks to the House Financial Services Committee that market turbulence may deter the Fed from the four increases that officials have forecast for 2016. Traders have pared bets on when the central bank will move again after the Fed in December hiked rates for the first time in almost a decade. Policy makers meet March 15-16.

“Yellen clearly sent a message that four hikes are off the table and that March is much less likely,” said Peter Tchir, head of macro strategy at Brean Capital LLC in New York. “But the market still has a much more negative view on the economy than the Fed does.”

Yield Curve

Treasury 10-year note yields fell six basis points, or 0.06 percentage point, to 1.67 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data, the lowest since Feb. 2, 2015.. The 2.25 percent security due in November 2025 rose 17/32, or $5.31 per $1,000 face amount, at 105 7/32.

Two-year note yields were little changed at 0.69 percent. The difference between two- and 10-year yields fell to the lowest since December 2007. A shrinking gap is known as a flattening yield curve.

“Yellen is telling people that we are on this extremely gradual pace of tightening, which means she still has this bias to lift the front end, which is supportive of the flattener,” said John Herrmann, director of U.S. rate strategy at Mitsubishi UFJ Securities USA in New York. “At the same time, she has highlighted the fact that the economy is unlikely to break out of this low growth.”

Note Auction

Yellen said recent financial-market volatility had "significantly" tightened financial conditions by pushing down stock prices, pushing up the dollar and raising some borrowing costs.

Futures traders see a 30 percent chance the Fed will lift its target this year, down from a 93 percent probability assigned at the end of last year. 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.

The $23 billion of notes maturing in February 2026 yielded 1.73 percent at Wednesday’s auction, down from 2.09 percent at the previous 10-year sale on Jan. 13 and the lowest since December 2012. A gauge of demand known as the bid-to-cover ratio fell to the lowest since August.

Three-year notes auctioned on Tuesday drew the least demand since 2009 as the securities were sold with the lowest yield in almost two years.

Treasuries have returned 3.8 percent this year, according to Bloomberg bond indexes. In 2015, they gained 0.9 percent.

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