U.S. Bonds Gain as Shorter Notes Little Changed on Fed Outlook

  • Yield curve narrows by four basis points, most in a week
  • Vice Chairman Fischer keeps door open to Fed rate increase

Treasury long bonds rose while short-term notes were little changed on speculation a Federal Reserve interest-rate increase will slow the economy and curb inflation.

The difference between five- and 30-year yields narrowed by four basis points to about 136 basis points Monday. It was the biggest decline in a week. Fed Vice Chairman Stanley Fischer indicated policy makers are open to increasing borrowing costs next month in comments Aug. 29.

"If the Fed raises the rate, longer yields will go down,” said Hideaki Kuriki, a Tokyo-based manager at Sumitomo Mitsui Trust Asset Management. “The American economy will be weaker.”

U.S. 30-year yields declined four basis points to 2.88 percent as of 11:21 a.m. in Tokyo. The price of the 2.875 percent security maturing in August 2045 rose 25/32, or $7.81 per $1,000 face amount, to 100 1/32.

Five-year yields were little changed at 1.51 percent. Benchmark 10-year yields fell two basis points to 2.16 percent.

“With inflation low, we can probably remove accommodation at a gradual pace,” Fischer said, without specifying when the Fed should start. “Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent,” he said at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming.

Long-term yields tend to track inflation expectations. Shorter-maturity yields are more sensitive to what the Fed does with its main interest rate, the target for overnight lending between banks.

Futures contracts indicate there’s a 38 percent chance of a Fed shift in September as of Aug. 28, and 60 percent odds of an increase by year-end, according to data compiled by Bloomberg. The figures are based on the assumption that the benchmark will average 0.375 percent after the first increase. The Fed’s target for its benchmark now is a range of zero to 0.25 percent.

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