- Traders look to for hints about future rate increases
- Treasuries head for steepest monthly loss since June
Treasuries rallied for the first time in eight days, snapping their longest slump since September 2014, as higher yields enticed investors amid speculation that the Federal Reserve will hold interest rates unchanged when it ends a two-day policy meeting Wednesday.
Benchmark 10-year note yields dropped from the highest level in a month. Traders see zero chance of an April rate increase amid signs U.S. economic growth is slowing. Policy makers will release their post-meeting statement at 2 p.m., which investors will parse to gauge the timing of the next move. Officials in March cut their median forecast for 2016 rate increases to two from four after raising the benchmark interest rate in December for the first time in a decade.
Traders aren’t fully pricing in another increase until February, while driving a gauge of expected volatility in Treasuries to the lowest since 2014 this month. The Fed is trying to tighten policy as central banks abroad maintain or increase stimulus amid a tepid global economic expansion and weak inflation. Markets may not be prepared if the Fed hints at a June increase, according to George Goncalves, head of rates research at Nomura Securities Inc. in New York, one of 23 primary dealers that trade with the Fed.
“We have been seeing rates grind higher for the last week and a half and I think that’s a reflection of markets getting ready for the Fed,” Goncalves said on Bloomberg TV Wednesday. “It’s all about what’s priced in,” he said. “We do think they’re going to keep June on the table, for better or worse, and we do think the markets would react to that.”
Treasury 10-year note yields declined four basis points, or 0.04 percentage point, to 1.89 percent as of 1:26 p.m. New York time, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 rose 11/32, or $3.44 per $1,000 face amount, to 97 20/32. The yield climbed to 1.94 percent Tuesday, the highest since March 23.
Demand for U.S. securities, perceived to be among the safest and most liquid in the world, rose as U.S. equities slipped Wednesday after Apple Inc. posted its first quarterly-revenue drop in more than a decade. The seven-day selloff in 10-year Treasuries, the longest since September 2014, occurred as investors pushed oil prices and equities higher, curtailing demand for the relative safety of government securities.
“This repricing, at these levels, is now lacking some conviction ahead of Yellen,” said Michael Leister, head of rates strategy at Commerzbank AG in Frankfurt. “There’s probably going to be a slight hawkish twist in the statement. Of course she’s going to be very careful not to spoil sentiment. There’s a hawkish risk, but a really tangible and harder preparation for a hike in June is probably a bit premature.”
Futures traders assign a 22 percent chance the Fed raises rates from a current range of 0.25 percent to 0.5 percent by June, and a 66 percent probability of a rate increase this year.
The Bloomberg U.S. Treasury Bond Index dropped 0.7 percent in April through Tuesday, set for its steepest monthly decline since June.