Dovish Yellen Primes Treasuries for Best Quarter Since 2012

  • There's now a zero percent chance of April rate move: futures
  • Yields at `very low levels,' Fed's John Williams says

Dovish Fed Chair Yellen Stresses Gradual Approach

U.S. Treasuries are poised for their best quarter in almost four years as bond traders push back bets on when the Federal Reserve will raise interest rates.

Fed Chair Janet Yellen’s warning Tuesday about global economic risks cut the probability of a rate boost at the April meeting to zero, with the odds indicated by futures prices not rising above 50 percent until November. While a bond rally in response to her remarks has now evaporated, Treasuries are still set for their biggest quarterly gain since June 2012.

“Yellen came out as dovish and as forceful as she was” at the Fed meeting in March, when officials kept rates unchanged and scaled back forecasts for how high they’ll rise this year, said Barra Sheridan, a rates trader at Bank of Montreal in London. “I didn’t think April was a live meeting before Yellen spoke yesterday and I definitely don’t now -- nor does the market.”

The 10-year Treasury yield rose two basis points, or 0.02 percentage point, to 1.82 percent as of 6:52 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 fell 5/32, or $1.56 per $1,000 face amount, to 98 7/32.

Yields could “easily” drop to 1.75 percent, Sheridan said.

Rejuvenated Rally

The 10-year note yield slumped eight basis points on Tuesday, the most in seven weeks, and fell two basis points earlier Wednesday. U.S. government securities have returned 3 percent this quarter, based on Bloomberg World Bond Indexes.

The Treasury Department is scheduled Wednesday to sell $28 billion of seven-year notes, which yielded 1.60 percent in pre-auction trading.

QuickTake The Fed Lifts Off

Yellen’s speech “was more dovish than I expected,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management Co. Ltd., which manages $200 billion. “The upside for Treasury yields is limited.”

Doh sees the yield staying in a range of 1.7 percent to 2.1 percent for the remainder of 2016.

The Fed should “proceed cautiously” in raising interest rates, Yellen said in New York. The chance of a move by the end of 2016 has declined to 64 percent, from 73 percent at the end of last week, futures prices compiled by Bloomberg indicate.

Central-bank policies have pushed long-term Treasury yields to “very low” levels, San Francisco Fed Bank President John Williams said in Singapore before Yellen’s appearance. He said the threat of a “pretty big correction” in bonds supports the argument for gradual rate increases.

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