Treasuries’ Response to Minutes Shows Markets Got Fed’s Message

Updated on
  • Futures imply 64 percent chance of December increase
  • Two-year note yield is near its highest level since 2010

Treasury traders’ muted reaction to the minutes from the Federal Reserve’s October meeting is signaling that policy makers got their message across last month.

The minutes of the Oct. 27-28 Fed session released Wednesday said officials "intended to convey" that a December interest-rate increase was appropriate, though no decision had been made.

Yields on two-year Treasuries, the maturity most sensitive to changes in Fed policy, were little changed near a five-year high after the announcement, while a derivatives-based measure of expected volatility fell. That was because Fed officials have stuck to a consistent message in recent weeks, according to Peter Tchir, head of macro strategy with Brean Capital LLC in New York.

"The Fed is doing a better job at communicating, because the message came out, and it’s completely consistent with what they’ve been saying" in speeches, said Tchir. "It’s refreshing."

Wednesday’s reaction contrasts with the confusion that traders expressed after the Fed’s September statement, when officials cited a range of concerns, including international economic growth and market volatility. That month’s decision fueled the biggest rally in two-year Treasury yields since 2009, and sent the implied probability of a December interest-rate increase plunging.

Price Stability

Yields on two-year notes rose about three basis points, or 0.03 percentage point, to 0.88 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due in October 2017 fell 1/32, or 31 cents per $1,000 face amount, to 99 3/4.

The note’s yield reached 0.95 percent on Nov. 6, when a report showed surging U.S. job growth.

Futures prices indicate a 64 percent chance the Fed will raise rates by the end of the year, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

"It leaves us right where we were, data dependent, and December is definitely still in play,"said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.