Treasuries Gain as Fed Signals Gradual Path of Rate Increases

Updated on
  • Longer maturities lead rally following policy announcement
  • Shorter debt gains capped as officials note ‘diminished’ risks

Why a Fed Rate Hike in September May Be Back on the Table

Treasuries gained, driving 10-year yields down the most in three weeks, as the Federal Reserve said it expects to raise interest rates gradually, while giving little hint that an increase is coming anytime soon.

Yields sank as officials kept the range for the federal funds rate at 0.25 percent to 0.5 percent following a two-day meeting, as forecast by nearly all economists surveyed by Bloomberg News. The longest-maturity Treasuries led the rally as the Fed said market-based measures of inflation compensation “remain low.”

Treasuries have rallied in 2016 as the Fed held off on raising rates after liftoff from near zero in December, while central banks in Japan and Europe maintained unprecedented stimulus. U.S. yields aren’t far from record lows, even after climbing in recent weeks on signs of strength in the world’s biggest economy.

“There’s not enough here to suggest that the Fed is any closer to raising interest rates,” said Anthony Valeri, fixed-income investment strategist at LPL Financial in San Diego. “It allows the Fed to keep their options open.”

Benchmark 10-year Treasury note yields fell six basis points, or 0.06 percentage point, to 1.5 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. Ten-year yields set a record-low 1.318 percent on July 6.

Yields on 30-year Treasuries dropped seven basis points to 2.21 percent.

Rally Limit

Gains on shorter maturities were limited as policy makers said that “near-term risks to the economic outlook have diminished.” The statement also said officials expect “that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

Heading into the Fed’s decision, bond traders saw a growing likelihood of a rate increase this year. The probability rose to about 50 percent this week, the highest since before last month’s U.K. vote to leave the European Union, futures data compiled by Bloomberg show.

The growth in bets on a rate boost coincided with a rebound in the American job market, along with other above-forecast data that pushed the Citigroup Inc. U.S. Economic Surprise Index to the highest since 2014.

The statement “suggests that while the balance of risks has shifted to the upside, the Fed is still extremely cautious about any knock-on effects from sluggish global growth and Brexit,” said Gennadiy Goldberg, an interest-rate strategist in New York at TD Securities (USA) LLC.

Treasuries have returned about 5 percent this year, according to Bloomberg’s U.S. Treasury Bond Index. Investors have sought the securities as a haven from global volatility and as an alternative to the almost $10 trillion in sovereign debt worldwide with negative yields.