Treasuries Drop as Yellen Says Fed Is on Pace to Raise Rates

Treasuries declined after Federal Reserve Chair Janet Yellen suggested that the central bank may increase interest rates sooner than anticipated next year.

Longer-term U.S. government securities led losses as policy makers said they will be patient on the timing of the first interest-rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised their assessment of the labor market. Yellen said at a news conference a rate increase won’t take place for “at least the next couple of meetings.” Shorter-maturity debt briefly pared losses after the central bank reduced projections for the federal funds rate.

“They went out of their way to throw in patience, and then say they could move the next couple of meetings,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The market has a different interpretation on what she said, outside of the statement.”

The yield on 10-year Treasuries rose eight basis points, or 0.08 percentage point, to 2.14 percent as of 5 p.m. in New York, according to Bloomberg Trader data. The 2.25 percent note due in November 2024 fell 22/32, or $6.88 per $1,000 face amount, to 101.

Yield Moves

Two-year note yields added six basis points to 0.62 percent, after dropping as much as four basis points. Thirty-year bond yields increased four basis points to 2.73 percent, after dropping yesterday to 2.70 percent, the lowest level since August 2012.

The volume of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, climbed to $446 billion, the most since Dec. 5. The daily average this year is $333 billion.

The Fed’s decision was made as financial markets face turbulence from plunging oil prices that have exacerbated disinflationary pressure facing Europe and Japan and contributed to Russia’s decision yesterday to raise its benchmark interest rate to stem capital flight.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said in a statement in Washington, removing a calendar-based phrase with language that gives it more flexibility to respond to economic data. “The committee sees this guidance as consistent with its previous statement that” rates are likely to stay near zero for a “considerable time.”

Rate Target

The benchmark rate will be 1.125 percent at the end of next year, compared with a 1.375 percent median estimate in September, quarterly estimates from U.S. central bankers showed today in Washington. The rate will be 2.5 percent at the end of 2016, and 3.625 percent at the end of 2017, according to the median.

“She’s done a remarkably good job about being noncommittal on the timing,” said Ward McCarthy, chief financial economist at Jefferies Group LLC in New York, one of the 22 primary dealers that trade with the Fed, referring to Yellen.

Yellen had suggested at her March 20 press conference that a decision to end the Fed’s bond purchases might presage the central bank’s move to normalize policy with its first rate increase by “around six months.”

Central bank officials have held the Fed’s overnight lending rate near zero since December 2008. Policy makers brought the Fed’s third program of bond purchases to an end in October.

While the U.S. has generated an average 228,000 jobs per month this year, inflation has remained below the 2 percent level aimed for by policy makers for the past 30 months.

Russia Report

The ruble has plummeted this week as the nation’s economy heads into recession, hurt by sanctions over the conflict in Ukraine and the tumbling global price of crude oil, Russia’s main export, which plunged below $60 a barrel for the first time in five years.

The U.S. consumer-price index dropped 0.3 percent, the most since December 2008, after being little changed the prior month, a Labor Department report showed. The median forecast of 84 economists surveyed by Bloomberg called for a 0.1 percent fall.

Yellen said the plunge in oil prices is a plus for the economy and will have only a transitory impact on inflation.

The “very substantial decline we have seen in oil prices is one of the most important developments shaping the global outlook,” Yellen said.

The U.S. is scheduled to sell $16 billion in five-year inflation-indexed securities tomorrow. The previous auction of the debt on Aug. 21, for an equivalent amount, sold at a yield of negative 0.281 percent, the least since December 2013. The sale attracted the second-highest demand on record from a class of investors that includes foreign central banks.

Treasuries returned 6.7 percent this year as of yesterday, according to the Bloomberg U.S. Treasury Bond Index, after losing 3.4 percent last year.

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