- Two-year note yield plunges as much as 0.28 percentage point
- Derivatives don’t fully price in a Fed rate hike for years
For Treasuries traders, it’s as if the Federal Reserve’s December interest-rate increase never happened.
The yield on two-year Treasury notes, the coupon maturity most sensitive to Fed policy expectations, plunged as much as 0.28 percentage point, the most since 2008, over the span of eight hours as Britons voted to leave the European Union. The yield is on pace for its lowest close since October, two months before the Fed raised its benchmark interest rate by a quarter-percentage-point in its first hike in nearly a decade.
The yield decline reflects a growing chorus of investors and analysts who say Britain’s political earthquake will force the U.S. central bank to abandon its plans to boost interest rates this year. For a time after liftoff, policy makers had envisioned four quarter-point increases this year. The two-year note yield’s plunge shows bond traders have little concern that the Fed will move this year to tighten monetary policy.
“This is a big uncertainty shock,” said Priya Misra, head of global interest-rates strategy in New York at TD Securities, one of the 23 primary dealers that trade with the Fed. “When the news came out, we moved our Fed call. The markets moved it out even further.”
The two-year note yield tumbled 14 basis points, or 0.14 percentage point, to 0.64 percent as of 12:46 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.625 percent security due June 2018 rose 9/32, or $2.81 per $1,000 face amount, to 99 31/32.
U.S. 10-year note yields plunged 19 basis points to 1.56 percent.
Analysts at HSBC Holdings Plc, Jefferies Group LLC and TD Securities are among those who have said that the Brexit result would prevent the Fed from raising rates in 2016.
The market-implied probability of a Fed rate increase by year-end was 12 percent, futures data compiled by Bloomberg show, down from a 50 percent chance assigned on Thursday before the U.K. vote. Traders see a 10 percent chance the Fed lowers rates next month and 12 percent chance of a cut by year-end.
At this point, “there’s an equal probability of a rate hike or a rate cut within the next 12 months,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
Derivatives prices show traders aren’t fully pricing in another Fed hike for at least two years.