Treasuries Rally as Fed’s Fischer Mulls Slow Productivity ‘Doom’

Does the Market Believe Fischer's Fed Forecast?
  • Futures show 52% probability of a 2016 interest-rate increase
  • Treasury to auction $88 billion in fixed-rate notes this week

Treasuries rallied, with 10-year note yields falling the most in more than a week, as a speech from Federal Reserve Vice Chairman Stanley Fischer signaled the central bank was unsure how to further boost the U.S. economy.

Benchmark yields declined across maturities as equities slipped with oil prices. Treasuries initially weakened after Fischer indicated on Sunday that an interest-rate increase by year-end was still under consideration. Yet he also questioned whether the Fed had the power to stimulate worker output, asking whether the economy is “doomed to slow productivity growth for the foreseeable future.”

The shift in how bond traders interpreted the remarks highlights the challenge of parsing Fed officials’ comments. Policy makers have signaled time and time again that they want to raise interest rates, yet remain on hold after liftoff eight months ago. Fed Chair Janet Yellen speaks Friday at an annual symposium in Jackson Hole, Wyoming.

“The implication is that Fed officials don’t really know what to do next,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The tools they’re discussing today to stimulate inflation, at some point in the mysterious future may or may not be successful.”

Yields Retreat

The U.S. 10-year note yield fell four basis points, or 0.04 percentage point, to 1.54 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. It was the biggest decline since Aug. 12. The price of the 1.5 percent security due in August 2026 was 99 19/32. 

Two-year note yields fell one basis point to 0.74 percent after earlier reaching the highest since June 23 -- the day Britain voted to leave the European Union, and before the result of that referendum sparked a buying spree in the safest government debt.

While Fischer didn’t explicitly mention the timing of the next rate increase, he highlighted there was “near full employment and inflation was close to where they want it to be,” in his comments. It came days after New York Fed President William Dudley said the market was underestimating the likelihood of policy tightening.

Treasury Auctions

“The Fed’s trying to draw a differentiation between the short-term outlook of the economy and the longer-term issues,” said Thomas Roth, senior Treasury trader in New York at MUFG Securities Americas Inc. “There’s been a lot of talk about the longer-term problems with productivity and other concerns,” Roth said, “but in the short-term the economic data has been better, and the Fed may be a little uncomfortable with the market’s pricing of the chances of a move this year.”

Futures prices indicate about a 52 percent chance the U.S. central bank will increase rates this year, up from a 45 percent probability a week ago, data compiled by Bloomberg show.

The Treasury is scheduled to auction $26 billion of two-year notes Tuesday, followed by $34 billion of five-year securities and $28 billion of seven-year debt later in the week. 

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