Two-Year Treasuries Rise for Third Day on Fed's Gradual Signal

  • Yields retreat from Wednesday's highs after decision
  • Futures imply diminished expectation of hike by March

Treasuries two-year notes rose for a third day after the Federal Reserve left interest rates unchanged and said it expects to raise them at a gradual pace, while keeping tabs on how the global economy and markets affect the U.S.

Yields retreated from their Wednesday highs as stocks fell following the Fed’s decision to hold its target range at 0.25 percent to 0.5 percent, as predicted. Officials said the Fed is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

Policy makers’ statement led traders to reduce bets that the Fed will raise rates again as soon as March, following liftoff from near zero in December. After oil prices and global stocks tumbled in January, bond bulls had been looking for more evidence that the central bank would scale back its projected path of four rate increases in 2016.

The reference to global conditions signals that for the Fed to reach “four hikes this year, we need to see a stabilization soon in the outlook for global growth and global markets to stabilize,” Ira Jersey, a senior client portfolio manager at OppenheimerFunds Inc. in New York, said on Bloomberg Television.

Wednesday’s Markets

Yields on benchmark two-year notes, the most sensitive to Fed policy changes, fell one basis point, or 0.01 percentage point, to 0.83 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 0.75 percent security maturing in January 2018 rose 1/32, or 31 cents per $1,000 face amount, to 99 26/32.

The benchmark 10-year note yielded about 2 percent, after reaching 1.94 percent last week, the lowest since October, as global markets convulsed.

Bond-market volatility declined for four straight days as of Tuesday, the longest stretch since November, as investors piled into bets the Fed won’t raise borrowing costs anytime soon.

Traders see a 19 percent chance of a Fed boost in March, down from 29 percent before Wednesday’s decision, data compiled by Bloomberg show. The calculations are based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

While the Fed indicated at its December meeting that it could raise rates four times this year, futures signal that traders anticipate about one increase by year-end, little changed from before the announcement.

“They did the minimum necessary to tell markets that they recognize the pressures in global conditions, financial markets and inflation expectations,” said Gene Tannuzzo, a senior portfolio manager in Minneapolis, Minnesota, with Columbia Threadneedle Investments, which manages about $184 billion in fixed-income assets.

Before it's here, it's on the Bloomberg Terminal.