Treasuries Surge as Yellen Says Caution Needed in Raising Rates

Janet Yellen: Reading on U.S. Economy Somewhat Mixed
  • Fed chair says central bank would have scope to ease policy
  • U.S. two-year note yield falls to lowest level in a month

Treasuries surged, with two-year note yields falling to the lowest level in a month, after Federal Reserve Chair Janet Yellen said caution in raising U.S. interest rates is “especially warranted" as the global economy presents heightened risks.

U.S. debt extended gains after Yellen made a case for running the economy hot in a speech to the Economic Club of New York, saying the central bank “would still have considerable scope” to ease policy if rates hit zero again. Treasuries had advanced earlier as crude-oil prices fell. A bond-market gauge of inflation expectations rose as investors bet on a faster pace of price increases.

“Yellen’s comments here are really setting the stage for a bid in the market,” said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “Her remarks were definitely more on the dovish side. You’re seeing increased concern about global risks.”

Yellen’s speech comes after policy makers this month left rates unchanged and pared forecasts for 2016 increases to two from four, citing risks posed by weaker global growth and financial-market volatility. The Fed is looking to tighten U.S. policy as central banks abroad maintain or increase stimulus. Officials including St. Louis Fed President James Bullard and Atlanta Fed President Dennis Lockhart last week said policy makers may raise rates as soon as their April 26-27 meeting as gauges of U.S. inflation and economic growth improve.

The yield on the two-year note, the security most sensitive to Fed policy, fell eight basis points, or 0.08 percentage point, to 0.78 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data, the lowest since Feb. 29. The 0.875 percent security due in March 2018 rose 6/32, or $1.88 per $1,000 face amount, to 100 6/32.

The U.S. 10-year note yield fell eight basis points to 1.80 percent.

The gap between yields on nominal 10-year notes and equivalent-maturity Treasury Inflation-Protected Securities, a bond-market gauge of expectations for consumer-price growth, climbed six basis points. It shows a 1.62 percent projected annual inflation rate over the next decade.

San Francisco Fed President John Williams said earlier Tuesday that the central bank will raise rates at a gradual pace.

Traders see a 26 percent chance the Fed will raise interest rates by June, down from a 38 percent probability assigned on Monday, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

The U.S. sold $34 billion in five-year notes at a yield of 1.335 percent, the second of three note auctions this week totaling $88 billion. Primary dealers, who trade government securities with the central bank and are obligated to bid at Treasury auctions, bought 38.9 percent of the notes, the most at a sale of the securities since August.

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