What Gives? Traders Bet Fed Shift on Hold Yet Treasuries Retreat

  • Seven-day decline is longest for Treasury index since 2013
  • Investors shun the safety of Treasuries as oil, equities gain

Traders are betting the Federal Reserve will delay raising interest rates when a two-day policy meeting ends Wednesday, and that ought to be welcome news in the Treasury market.

Investors instead have suffered seven straight days of losses, the longest run of declines in almost three years. What gives?

Pacific Investment Management Co. and BlackRock Inc. say the Fed is letting the U.S. economy heat up before moving. Investors seeking higher returns than those available from government bonds have reversed a rout in oil prices and pushed equities higher this year.

“They’re not going to hike the interest rate at this meeting,” said Kim Youngsung, the head of overseas investment in Seoul at South Korea’s Government Employees Pension Service, which oversees $13.1 billion. “At the beginning of this year, we were worried about deflation. Oil prices have stabilized. That is why we can see an increase in Treasury rates.”

The selloff stalled Wednesday, with benchmark 10-year note yields declining two basis points to 1.91 percent as of 1:47 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 rose 5/32, or $1.56 per $1,000 face amount, to 97 15/32.

Losing Streak

The Bloomberg U.S. Treasury Bond Index fell for the past seven sessions, the longest losing streak since June 2013. U.S. government securities have dropped 0.7 percent in April, heading for their steepest monthly decline since last June, based on the index.

Crude oil has rallied more than 70 percent from a 12-year low set in February. The Standard & Poor’s 500 Index climbed this month to its highest level since November.

The Fed “wants to run the economy at least a little hot,” Pimco’s Richard Clarida wrote in a report this month.

“The Fed made a decision that will let inflation run hotter, that will let employment run hotter,” BlackRock’s Rick Rieder said after policy makers held rates at their March meeting.

Inflation expectations have been rising. The difference between yields on five-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 1.58 percentage points this week. It was the highest level since July, though short of the central bank’s 2 percent target.

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