Treasury Bonds Gain First Time in Three Days as Fed Reevaluated

Treasury 30-year bonds rose for the first time in three days as investors reevaluate how quickly Federal Reserve officials will increase interest rates.

Yields on all government securities surged two days ago after Fed Chair Janet Yellen suggested policy makers could raise the target rate for overnight loans between banks by the middle of next year. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said today that the central bank’s new guidance risks holding back economic growth.

“The market is under the impression that the Fed could raise rates sooner than expected, but even if they do, the expectation is that it will be slow and gradual,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “With inflation still not an issue and the prospects for the front-end uncertain, the long-end looks more appetizing.”

Bond yields fell six basis points, or 0.06 percentage point, to 3.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.625 percent bond maturing in February 2044 rose 1 point, or $10 per $1,000 face value, to 100 10/32.

Ten-year note yields, the benchmark for everything from corporate loans to mortgages, dropped three basis points to 2.74 percent. Two-year notes were little changed to yield 0.43 percent, after surging seven basis points on March 19, the biggest one-day rise since 2011.

Treasury Futures

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending March 18, according to U.S. Commodity Futures Trading Commission data. The figure is the least since the week ending Feb. 28.

Speculative short positions, or bets prices will fall, outnumbered long positions by 55,014 contracts on the Chicago Board of Trade. Net-short positions fell by 63,196 contracts, or 53 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Net longs in two-year note futures dropped by 75 percent to 3,137 from 12,476 contracts in the week ending March 18.

Treasury trading volume declined 29 percent to $337 billion from $477 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose to $582.4 billion on March 13, the highest in more than nine months, according to ICAP.

Note Auctions

The Federal Open Market Committee’s omission of quantitative benchmarks to guide changes in interest rates creates “uncertainty about the extent to which the Committee is willing to use monetary stimulus to foster faster growth,” Kocherlakota said today. “This uncertainty is a drag on economic activity.”

Inflation expectations have come down as the gap between yields on 30-year bonds and similar-maturity Treasury Inflation Protected Securities fell to 2.28 percent, from a high this year of 2.46 percent on Jan. 10, implying that consumer prices will rise at a slower pace over that span.

The Treasury will sell $32 billion in two-year fixed-rate notes, $35 billion in five-year debt and $29 billion in seven-year securities next week. It will also sell $13 billion in two-year floating-rate notes on March 26.

Multiple Measures

Yellen said the central bank said it will look at a wide range of data in determining when to lift its benchmark interest rate from near zero, including the labor market, inflation expectations and financial markets, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate.

Fed officials predicted their target rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market.

“The doves are coming closer to the hawks, that’s why the market adjusted as it did,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We’ve cheapened up a bit.”

Treasuries also dropped this week as Russia completed the process of annexing Crimea and Ukraine withdrew its military forces from the Black Sea region, reducing the haven appeal of the securities.

Treasuries held by foreign central banks rose by $32.2 billion to $2.89 trillion as of March 19, according to Fed data The holdings had dropped $104.5 billion as of March 12.

The figures damped speculation that last week’s record drop reflected Russia shifting its holdings out of America amid the threat of sanctions.

Inflation Securities

The gap between the yields on the 10-year note and the 30-year bond narrowed to as little as 85.4 basis points, the least since May 2010.

Inflation measured on a 12-month basis has been below the Fed’s 2 percent goal for almost two years, and prices rose 1.2 percent for the year ending January.

U.S. index-linked bonds underperformed their nominal peers this month, declining 1.1 percent through yesterday, according to Bank of America Merrill Lynch Bond Indexes. Treasuries dropped 0.6 percent.

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