Treasuries Rise While Dollar Erases Gains on Fed Minutes

Many Fed Officials Saw Risks on Foreign Weakness

Treasuries rallied while the dollar retreated after minutes of the Federal Reserve’s last meeting indicated officials are inclined to hold interest rates near zero for longer. Crude oil slid, while the Standard & Poor’s 500 Index closed near an all-time high.

Yields on 10-year Treasury notes dropped six basis points to 2.08 percent by 5 p.m. in New York, falling for the first time this week. The Bloomberg Dollar Spot Index slipped 0.1 percent after earlier rising as much as 0.4 percent, as the greenback weakened 0.4 percent against Japan’s yen. The S&P 500 closed little changed at 2,099.68 after reaching a record high on Tuesday, as energy stocks retreated while utilities increased. U.S. crude dropped for the first time in four days.

Fed policy makers judged that the risks currently facing the U.S. economy argued for keeping benchmark rates near record lows for longer, minutes of their January meeting showed. The officials, while considering risks to be “nearly balanced,” pointed to strength in the dollar, international flash points from Greece to Ukraine, and slow wage growth as points against the first rate rise since 2006. Most Fed policy makers expect to boost borrowing costs this year, the minutes showed.

“It’s evident that they’re going to stick with the patient theme,” Jeff Sica, president and CEO of advisory firm Circle Squared Alternative Investments, which oversees $1.5 billion, said in a phone interview. “This was a status quo message. They’re playing their cards very close to the vest because of the vulnerability in Europe and the potential of this Greek crisis getting worse.”

Fed Outlook

Speculation that the Greek debt impasse is easing helped the S&P 500 reach an all-time high Tuesday, while bank stocks led European equities to their highest level in more than seven years on Wednesday. A government official, speaking on condition of anonymity, said Greece will submit its request for a loan extension Thursday as the nation negotiates with its creditors.

The Fed is weighing encouraging news on growth and the labor market with below-target inflation in assessing the correct moment to raise rates, the minutes released Wednesday in Washington showed.

The central bank said after its Jan. 27-28 meeting that policy makers “can be patient” as they consider when to raise the borrowing costs, even as the Fed described the labor market as “strong.” A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years.

Treasuries, Dollar

Yields on two-year Treasury notes rose to as high as 0.69 percent, the highest rate since Jan. 5, before sliding six basis points, or 0.06 percentage point, to 0.60 percent after the minutes. The yield on the note, which is regarded as more sensitive to expectations of changes in Fed policy than longer-term peers, was as low as 0.40 percent last month.

The Bloomberg dollar gauge, which tracks the greenback against 10 major counterparts, fell for a second day as the U.S. currency retreated at least 0.2 percent versus peers from New Zealand to South Africa.

The yen strengthened to 118.79 per dollar, paring Tuesday’s 0.7 percent retreat. Bank of Japan Governor Haruhiko Kuroda told reporters he won’t hesitate to adjust policy should the underlying trend in inflation changes. Earlier, the BOJ said Japan will continue a moderate recovery, while declining energy prices will limit increases to the rate of inflation.

Japan’s Topix index climbed 1.4 percent to extend its highest close since December 2007.

U.S. Data

Data Wednesday on U.S. housing starts showed builders broke ground on fewer residential construction projects in January as demand for single-family homes cooled from an almost seven-year high. Factory production rose less than forecast in January, held back by a decline in motor vehicle assemblies and weaker demand for construction materials.

Wholesale prices in the U.S. fell more than forecast in January, led by plunging energy costs, signaling inflation remains benign even as the economy is expanding.

“At the margin, U.S. economic momentum seems to be slowing a bit,” Alan Gayle, who helps oversee about $45 billion as a senior strategist at Ridgeworth Capital Management, said by phone. “A lot of investors are viewing the recent softer data with some nervousness, but it hasn’t changed their positive outlook for the economy in 2015.”

Among U.S. stocks moving Wednesday, Exxon Mobil Corp. declined 2.2 percent after Warren Buffett’s Berkshire Hathaway Inc. exited a $3.7 billion investment in the company.

Holdings Cut

Boston Scientific Corp. jumped 12 percent as the company said it will pay $600 million to Johnson & Johnson to settle a lawsuit over its $27.5 billion acquisition of Guidant Corp. almost a decade ago. Deere & Co. climbed 3.2 percent after Berkshire Hathaway more than doubled its stake in the company in the fourth quarter.

Some big hedge fund managers cut their holdings of U.S. stocks in the fourth quarter and shifted assets globally as the slide in oil prices hammered energy holdings. Anticipation of more stimulus from the European Central Bank, along with a weaker euro and expectations of solid earnings, has had an affect on sending money overseas.

David Tepper’s Appaloosa Management had $2.74 billion less in U.S. stocks in the fourth quarter, a 40 percent drop from the previous quarter. Soros Fund Management, the family office of billionaire hedge fund manager George Soros, moved about $2 billion into companies in Asia and Europe, according to a person familiar with the strategy.

Some managers, such as Leon Cooperman, 71, remain bullish on the U.S., while predicting bigger gains elsewhere.

“We expect the European and Japanese equity markets to outperform the U.S. in the coming year,” Cooperman, who runs Omega Advisors, wrote in an investor letter last month.

European Gains

The Stoxx Europe 600 advanced 0.9 percent, rising to its highest close since November 2007. The gauge has surged 11 percent this year, boosted by the ECB’s plans to undertake quantitative easing. Of 18 western-European markets, 17 gained Wednesday, while the U.K.’s FTSE 100 Index slipped from its highest level since 1999.

Greece’ ASE Index climbed 1.1 percent for its first gain in three days as Piraeus Bank SA and National Bank of Greece SA climbed more than 4.8 percent. Credit Agricole SA advanced 6.7 percent after France’s third-largest bank posted fourth-quarter earnings that beat analysts’ estimates.

“Markets like certainty -- if Greece nails down this six-month loan extension, that will bring a little more certainty at least in the short term,” said Darren Hepworth, the Leeds, U.K.-based global trading director at TD Direct Investing (Europe) Ltd. “It’s not just the Greece situation” driving markets higher, he said. “You’ve had a sustained period of low inflation and low interest rates with a fall in oil prices.”

Greek Bonds

Greece’s government bonds rose for the first time in three days. Yields on three-year notes dropped 118 basis points to 17.37 percent. The rate on 10-year debt declined 28 basis points to 9.96 percent after reaching 11.40 percent on Feb. 2 amid concern the nation would fail to reach a funding agreement. That compares with as high as 44.21 percent in 2012 when Greece underwent the biggest debt restructuring in history.

Sterling strengthened 0.6 percent to $1.5442. The U.K. jobless rate fell to 5.7 percent, the lowest level in more than six years, in the fourth quarter. Other reports showed average earnings rose more than economists estimated and the Bank of England said it sees inflation rising “fairly sharply” as the effects of weaker oil prices fade.

Truce Wobbles

Russia’s dollar-denominated RTS Index advanced 3.9 percent, while the ruble added 1.5 percent in a fourth day of gains. The country’s stocks and currency have been recovering with the oil price and after President Vladimir Putin and his Ukrainian counterpart Petro Poroshenko reached a cease-fire agreement to try to ease the conflict in Ukraine’s east.

The four-day-old truce was on the brink of collapse on Wednesday as the battle for a transport hub in Ukraine’s east came to a head, with the government seeking to withdraw its forces after weeks of fighting to hold on to the strategic location.

While the ruble has outperformed this month, the currency is down 43 percent since Russia’s incursion into Crimea in March last year.

West Texas Intermediate oil slipped 2.6 percent to $52.14 a barrel in New York, while Brent crude, the benchmark for more than half of the world’s oil, fell to $60.53 a barrel.

Asian Holidays

Stockpiles of oil in the U.S., the world’s No. 1 consumer of the commodity, probably rose by 3 million barrels through Feb. 13, according to a Bloomberg News survey of analysts before an Energy Information Administration report on Thursday. Supplies climbed over the previous five weeks to 417.9 million, the highest level in records dating back to August 1982.

The Hang Seng China Enterprises Index of mainland Chinese companies listed in Hong Kong increased 0.6 percent Wednesday, a fifth day of gains and the longest rally in six months. The city’s stock market closed at noon and will reopen on Feb. 23, while mainland exchanges are closed through Feb. 24 for the Lunar New Year holidays.

Markets in South Korea, Taiwan and Vietnam were also shut Wednesday for holidays.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE