Treasury Yields Fall to Lowest in a Week After Fed Notes Risks

  • Yield curve flattens after rising by the most since December
  • U.S. auctions $11 billion in 10-year inflation-linked debt

Treasury 10-year yields declined to the lowest in a week a day after the Federal Reserve said threats to global economic growth mean it will raise interest rates more slowly than previously anticipated even as U.S. economic data improve.

U.S. government debt pared gains after a Philadelphia Fed business index touched the highest since February 2015, suggesting advances in manufacturing. The gap between yields on two-year Treasuries, the security most sensitive to Fed policy, and 30-year bonds, which are more influenced by expectations for inflation and economic growth, declined after it rose on Wednesday by the most in more than three months.

"We’re pushing back a little bit from the reaction to the Fed," said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. The Philadelphia index "suggests the manufacturing sector is starting to turn around a little bit." 

Treasuries surged Wednesday after policy makers lowered their median interest-rate projection to two increases by year-end from a forecast of four in December. Officials cited the potential impact from weaker global growth and financial-market turmoil on the U.S. economy, even as a gauge of inflation expectations surged after data on Wednesday showed unexpected gains in core consumer prices.

Yield Curve

Benchmark 10-year note yields fell one basis point, or 0.01 percentage point, to 1.90 percent as of 5 p.m. New York time, the lowest on a closing basis since March 9. The yield fell six basis points on Wednesday. The 1.625 percent security due in February 2026 rose 3/32, or 94 cents per $1,000 face amount, to 97 18/32.

The yield on the two-year note rose one basis point to 0.86 percent. It slid 11 basis points on Wednesday, the most since September. The 30-year bond yield fell three basis points to 2.69 percent.

The gap between the yields on two- and 30-year Treasuries, known as the yield curve, fell three basis points to 1.82 percentage points, after steepening on Wednesday by the most since December. It reached the least since 2008 on Tuesday.

The Federal Open Market Committee on Wednesday kept its target range for the benchmark federal funds rate at 0.25 percent to 0.5 percent. The median of its updated quarterly projections, known as the dots, saw the rate at 0.875 percent at the end of 2016, compared with the 1.375 percent level forecast in December.

TIPS Auction

“I don’t think they could have been more dovish,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “A lot of people were short, they had sold in anticipation of higher yields, they didn’t get a chance to buy them back and then were scrambling a bit.” A short position is a bet that a security will fall in value.

Derivatives traders see a 69 percent chance the Fed will raise rates by December, according to futures data compiled by Bloomberg, down from an 80 percent probability assigned on March 15, the day before the Fed issued its policy statement. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

“You’ve got to struggle to find a bullish case" for the Fed to raise rates aggressively, Keeble of Credit Agricole said.

The U.S. sold $11 billion in 10-year Treasury Inflation-Protected Securities Thursday at a yield of 0.315 percent. The sale was characterized as "weak" in a Bloomberg News survey as investors remain skeptical that inflation will rise toward the Fed’s 2 percent target. Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

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