U.S. 30-Year Bond Stages Longest Rally Since August on Fed Pace

Updated on
  • Yield curve flattens as investors anticipate gradual path
  • Gap between two-, 30-year yields is tightest in three months

Thirty-year Treasuries gained for a third straight day, the longest rally since August, after Federal Reserve officials signaled they’ll proceed cautiously in raising interest rates after lifting the overnight target from near zero.

With investors anticipating that interest rates will remain lower for longer and inflation remaining benign, the extra yield on 30-year bonds over two-year notes shrank to the least since August on a closing basis.

Minutes of the Fed’s October meeting, released Wednesday, showed policy makers “intended to convey” that a December rate increase may be appropriate. Officials also indicated “that it would probably be appropriate to remove policy accommodation gradually.”

"The Fed’s going out of its way to soften the blow of the first hike and talking about the path being more important," said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

Thirty-year yields fell three basis points, or 0.03 percentage point, to 3.01 percent as of about 5 p.m. New York time, according to Bloomberg Bond Trader data. The price on the 3 percent security due in November 2045 rose 5/8, or $6.25 per $1,000 face amount, to 99 25/32.

Fed Ahead

Longer-dated Treasuries, which are more sensitive to inflation, are rebounding after yields touched three-month highs following a Nov. 6 report showing surging U.S. job growth. Even with the labor-market strength, the central bank’s preferred price-growth gauge hasn’t met its 2 percent goal since 2012.

With the Fed potentially weeks away from its first rate increase since 2006, two-year yields remained close to a five-year high. As a result, the spread between two- and 30-year yields flattened to 2.11 percentage points.

“The market is prepared for a measured pace,” said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania.

The implied probability of an increase by the Fed’s December policy meeting rose to 66 percent, from about 30 percent a month ago, 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. The Fed hasn’t lifted its target since 2006.

Traders are pricing in two Fed increases by November 2016, overnight index swaps show.