Treasury Two-Year Yield Declines to One-Month Low on Fed Outlook

  • Traders price out April rate increase, look to December
  • Treasuries are headed for best quarter since June 2012

Treasury two-year note yields fell to the lowest in more than a month as traders pushed back bets on the timing of the next interest-rate increase from the Federal Reserve.

The securities, among the most sensitive to the outlook for central-bank policy, have gained since the Fed’s latest policy decision on March 16, when officials scaled back forecasts on how interest rates would progress this year. Futures signal a 22 percent probability of a move in June, compared with a 54 percent chance assigned March 15. Fed Chair Janet Yellen reiterated on Tuesday that an uncertain global environment calls for a more gradual approach to raising rates.

“What Yellen has done is taken out any near-term danger of a Fed hike,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. Her comments have also shown “that the Fed is going to be very, very cautious, and when they say there is going to be a very slow and gradual increase in rate hikes in coming years they really do mean that.” Callan said a June rate increase “seems to be off the table.”

Treasury two-year yields fell one basis point, or 0.01 percentage point, to 0.74 percent as of 11:46 a.m. New York time, according to Bloomberg Bond Trader data, the lowest on an intraday basis since Feb. 26 and down from almost 1 percent on March 16. The price of the 0.875 percent security due March 2018 was 100 1/4.

Callan said Yellen has managed to “stop any upward movement towards 1 percent” in two-year yields, which was a level “we could have expected if a hike was impending.”

Benchmark 10-year note yields fell two basis points to 1.80 percent, while 30-year bond yields fell three basis points to 2.62 percent.

U.S. government securities returned 2.9 percent this quarter through Wednesday, the best performance since June 2012, according to Bloomberg World Bond Indexes. That’s still less than the 4.8 percent earned by U.K. gilts and 3.8 percent from German securities over the same period.

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