Treasuries Jump as Fed Minutes Damp Speculation on Higher Rates

Treasuries climbed as minutes of the Federal Reserve’s January meeting showed many policy makers favored keeping the benchmark interest rate at virtually zero “for a longer time” amid slow wage growth and international turmoil.

The yield on the two-year note, more sensitive to central-bank moves than longer-term peers, dropped from a five-week high as traders trimmed bets on the timing of the central bank’s first rate increase since 2006. Officials weighed employment gains versus persistently low inflation, the record of the meeting showed.

“They talked about how inflation expectations are not rock solid,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “That was reassuring to the markets and responsible for most of the rally. They were fairly dovish minutes.”

Two-year yields sank seven basis points, or 0.07 percentage point, to 0.60 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They increased earlier to 0.69 percent, the highest level since Jan. 5, on speculation the minutes would show the Fed moving closer to raising rates. The price of the 0.5 percent debt due January 2017 rose to 99 26/32.

Ten-year yields fell six basis points to 2.08 percent.

U.S. policy makers have held the key rate target in a range of zero to 0.25 percent since 2008 to support the economy. The Bank of Japan kept unprecedented monetary stimulus in place this week, while the European Central Bank has dropped interest rates to record levels and committed last month to buy $1.3 trillion of bonds to spur growth.

‘Every Excuse’

“The Fed is going to make every excuse not to tighten,” said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “The Fed doesn’t need to do anything with the other central banks easing.”

Fed fund futures traded on the CME Group Inc. exchange showed a 20.7 percent chance the central bank will lift rates at their policy meeting in June, according to data analyzed by Bloomberg, down from 25 percent Tuesday.

“The market was expecting a little more hawkish tone to the minutes,” said Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York. “The market has pushed out the implied timing of Fed lift-off on the back of what is perceived to be more dovish minutes.”

The implied yield on the December 2015 Eurodollar futures contract, priced at expiration on the three-month dollar London interbank offered rate and used to speculate on the future path of the Fed’s rate, fell 0.06 percentage points to 0.80 percent after the minutes were reported. The December fed fund futures contract’s yield is at 0.505 percent, down from 0.565 percent Tuesday.

Fed Patience

The Federal Open Market Committee reiterated in a statement after the Jan. 27-28 meeting that it “can be patient” as it considers when to raise the benchmark interest rate, even as it described the labor market as “strong.”

Many officials at the meeting said dropping the reference to patience would risk shifting rate-increase expectations “toward an unduly narrow range of dates” and voiced concern that markets might overreact, the minutes showed.

The argument for raising rates sooner has been bolstered by unexpected labor-market strength. While average hourly earnings have shown limited growth since 2009, non-farm payrolls rose by more than 1 million jobs from November through January, a Feb. 6 report showed. The economy grew 2.4 percent in 2014, the most in four years.

At the same time, a plunge in oil prices has kept inflation on check. Consumer prices as measured by the Fed’s preferred gauge rose 0.7 percent in December from a year earlier, and the rate has lingered below the central bank’s 2 percent goal for more than 2 1/2 years.

Fed Chair Janet Yellen has said the committee will want to be “reasonably confident” before it raises rates that inflation will move back up toward 2 percent over time.

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