The 2% Level Beckons for U.S. 10-Year Yields as Liftoff Debated

  • Yellen says most on FOMC expect 2015 Fed rate increase
  • Bond-market inflation gauge has lowest close in a month

The Treasuries market is refocusing on a return to the 2 percent yield level for 10-year notes as investors debate the timing of the Federal Reserve’s liftoff from near-zero interest rates.

Fed Chair Janet Yellen said in a speech Thursday after bond markets closed in the U.S. that the central bank is on track to raise interest rates this year, even as she said economic “surprises” could lead policy makers to change that plan. The dollar gained on the comments, made before Treasuries began trading in Asian hours Friday.

During Thursday’s New York trading, Treasuries rose as an equities selloff spurred demand for a haven. Government debt extended gains seen since the Federal Open Market Committee refrained from raising rates Sept. 17, citing external risks. 

"I think part of the notion of the speech wasn’t really to try to shake the markets too much," said Aaron Kohli, a fixed-income strategist in New York at Bank of Montreal, one of 22 primary dealers that trade with the Fed. "It just seems to reaffirm that December is still in the cards."

U.S. 10-year note yields fell two basis points, or 0.02 percentage point, to 2.13 percent as of about 5 p.m. in New York, after touching the lowest point on an intraday basis since Aug. 26, according to Bloomberg Bond Trader data. The 2 percent note due August 2025 rose 6/32, or $1.88 per $1,000 face amount, to 98 7/8.

Range Monitor

The benchmark 10-year note briefly traded below 2 percent last month amid market turmoil following China’s currency devaluation. Before that, it last traded below 2 percent in April.

“With just one day of trading under 2.10 percent, the 10s can break the range since Aug. 27 and open 2.00-2.05% for sustained trading in October,” Jim Vogel, interest-rate strategist at FTN Financial Capital Markets, wrote in a note Thursday. “Post-August and post-FOMC, risk markets have not recovered the ability to weather even the smallest irritation without an immediate decline.”

Treasuries gained Thursday as stocks declined amid mixed U.S. economic data, including a report that showed orders for non-military capital goods excluding aircraft fell last month and another showing sales of new homes in the U.S. climbed. Bonds remained higher after the government sold$29 billion of seven-year securities.

Yellen Talks

Yellen gave her speech, entitled “Inflation Dynamics and Monetary Policy,” in Amherst, Massachusetts.

“I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective,” she said in the remarks.

Fed officials including Atlanta Fed President Dennis Lockhart have argued in recent days that colleagues should still tighten policy this year.

Traders haven’t been swayed. The chances of a rate increase by December have tumbled below 50 percent since last week’s policy meeting, according to futures prices.

The 10-year break-even rate, a market gauge of the outlook for consumer prices derived from the yield difference between Treasuries and inflation-protected securities, fell to 1.5 percent, the lowest in a month on a closing basis.

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