Treasuries Gain as Fed Minutes Show Division on Rate-Hike Path

Fed Officials Divided Over Need for a Rate Hike
  • Benchmark 10-year notes advanace for first time in three days
  • Some policy makers seek more evidence of stronger inflation

Treasuries gained, with 10-year notes halting a two-day decline, as minutes from the Federal Reserve’s July policy meeting showed officials were split on whether an interest-rate hike was needed soon.

Benchmark 10-year yields fell after the minutes showed policy makers were divided on whether the job market would continue to strengthen and saw little risk of a marked pickup in inflation. The release of the minutes comes after New York Fed President William Dudley on Tuesday said a hike was possible as soon as next month.

“Given Dudley’s very hawkish remarks yesterday, the market was positioned for a more hawkish set of minutes,’’ said Gennadiy Goldberg, an interest-rate strategist at TD Securities. “These minutes show a multitude of opinions with no clear voice on when to hike rates, so are less hawkish than the market had been expecting.”

Traders assign coin-flip odds to a Fed hike by year-end, according to futures prices compiled by Bloomberg. After liftoff from near zero in December, officials have twice cut their projections for the path of rates this year, as improving U.S. economic data contrast with signs of slowing growth abroad. 

Yield Curve

Benchmark 10-year note yields fell three basis points, or 0.03 percentage point, to 1.55 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. 

“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity,” according to the minutes released in Washington on Wednesday. “A couple of members preferred also to wait for more evidence that inflation would rise to 2 percent on a sustained basis.”

The report contained no explicit reference to the timing of the next potential interest-rate increase, beyond noting that a “couple” of officials were advocating for one in July.

“They did indicate a better economy, and clearly the Fed is slowly moving towards another rate hike,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch, in an interview on Bloomberg Television. “A lot of people expected a bit of hawkishness there.’’

Yields on two-year notes, the coupon securities most sensitive to Fed policy expectations, fell two basis points to 0.73 percent. Measures of the yield curve pared earlier declines, with the difference between yields on two- and 10-year debt at about 82 basis points.

“The less-hawkish-than-expected minutes are leading investors to pare some of their curve-flattening positions, which pushed the curve steeper right after the minutes’ release,” Goldberg of TD Securities said.

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