Treasuries Rise With U.S. Stocks as Fed Minutes Signal Low Rates

Updated on
  • Officials split in July on whether rate increase needed soon
  • Asian index futures diverge as dollar pares, but holds gains

FOMC Minutes Show Battle Over Rates Raging in Fed

U.S. bonds and stocks rose after minutes of the Federal Reserve’s last meeting indicated officials saw little risk of a sharp uptick in inflation, fueling bets interest rates will stay lower for longer. The dollar pared gains.

Two-year Treasuries, the most sensitive to policy expectations, halted a back-to-back decline, while the S&P 500 Index rebounded as a rally in utilities and financial stocks overshadowed disappointing results from Target Corp. and Lowe’s Cos. While the greenback advanced against most of its major peers, it lost ground after the Fed’s statement. Oil posted its longest advance since April 2015 as U.S. crude and fuel stockpiles dwindled.

Bets that central banks around the world will remain accommodative amid uneven growth propelled global equities to a one-year high this month and sent the dollar tumbling. The Fed minutes struck a more dovish tone when compared with comments this week from some policy makers, with New York Fed chief William Dudley flagging the prospect of a rate hike as soon as next month. Traders assign roughly coin-flip odds of an increase in U.S. borrowing costs by year-end, according to futures prices compiled by Bloomberg.

“They’re giving the same amount of ammunition to the hawks and the doves,” said Mark Heppenstall, the Horsham, Pennsylvania-based chief investment officer of Penn Mutual Asset Management, which oversees about $20 billion. “We still have a lot of economic numbers to be released between now and December. If I had to guess, I would say that the earliest we see a hike would be early 2017.”

Fed officials were divided in July over the urgency to raise interest rates again, with some preferring to wait because inflation remained benign and others wanting to increase soon as the labor market nears full employment. At that meeting, the Federal Open Market Committee left the benchmark interest rate in a range of 0.25 percent to 0.5 percent.

“It seems like the Fed is finding reasons not to hike interest rates, and therefore it was a market-friendly release,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion.

Traders seeking further clues as to the timing of the next rate hike will now look to Fed Chair Janet Yellen’s speech at a meeting of global policy makers in Jackson Hole, Wyoming, later this month.


Benchmark 10-year Treasury yields fell three basis points, or 0.03 percentage point, to 1.55 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. Rates on two-year notes dropped two basis points to 0.73 percent.

After liftoff from near zero in December, Fed officials have twice cut their projections for the path of rates this year, as improving U.S. economic data contrast with signs of slowing growth abroad.

“Given Dudley’s very hawkish remarks yesterday, the market was positioned for a more hawkish set of minutes,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York. “These minutes show a multitude of opinions with no clear voice on when to hike rates, so are less hawkish than the market had been expecting.”

Germany’s 10-year bond yield declined two basis points to minus 0.05 percent, while the U.K.’s was at 0.56 percent. Portuguese bonds tumbled for a second day on speculation that ratings company DBRS Ltd. may downgrade the nation’s sovereign debt.


The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 peers, rose 0.2 percent, snapping a three-day retreat. The greenback was little changed at $1.1289 per euro, and also steady at 100.28 yen.

“We’ve basically seen the dollar run out of steam,” said Robert Tipp, chief investment strategist in Newark, New Jersey, for the fixed-income division of Prudential Financial Inc. “We’re ultimately going to see the dollar break lower versus developed currencies,” particularly the yen, he said.

The dollar index has slumped more than 5 percent this year with Fed policy makers yet to see signs that inflation is moving toward their 2 percent goal. That means the U.S. central bank is less likely to diverge from the paths of the Bank of Japan and European Central Bank, which are boosting monetary stimulus as they seek to spur flagging growth.

The MSCI Emerging Markets Currency Index posted the biggest drop since July 5, slipping 0.5 percent. South Korea’s won tumbled the most since June, while the Chilean peso and Malaysian ringgit lost at least 0.7 percent.


The S&P 500 rose 0.2 percent to 2,182.22, wiping out a 0.4 percent slide from earlier in the day. Equities rebounded as utilities, health-care and financial stocks shook off earlier declines, climbing at least 0.2 percent. Target and Lowe’s each lost more than 5.6 percent, while Urban Outfitters Inc. was a bright spot, surging 15 percent after its results exceeded analysts’ forecasts.

The Stoxx Europe 600 Index slipped 0.8 percent as miners slumped. ASML Holding NV sank after Intel Corp. said it won’t use the semiconductor-equipment maker’s lithography technology to make some of its chips. Carlsberg A/S slid after the Danish brewer reported first-half profit that missed analysts’ estimates as weakness in Russia’s ruble eroded earnings. Emerging-market stocks fell for a second day, with Saudi Arabian shares down the most in almost three months.

In Asia, index futures signaled a mixed day ahead for the region’s equities. Nikkei 225 Stock Average futures fell in Osaka, while rising in Chicago as contracts on Chinese shares retreated. Futures on Australia’s S&P/ASX 200 Index added 0.1 percent, and those on the Kospi index in Seoul were little changed.


West Texas Intermediate crude for September delivery rose for a fifth day, gaining 0.5 percent to settle at $46.79 a barrel in New York, the highest price since July 6. Total volume traded was 37 percent above the 100-day average.

American crude inventories fell by 2.51 million barrels in the week ended Aug. 12, according to an Energy Information Administration report. A Bloomberg survey ahead of the data had forecast an inventory build of 950,000 barrels. Gasoline supplies dropped by 2.7 million barrels, more than the 1.7 million decline that had been forecast, while refineries used 268,000 barrels a day more crude than a week earlier. 

“We’ve got a trifecta here,” said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC who helps manage $14.1 billion. “There are lower crude inventories, lower gasoline and lower Cushing.”

Gold and silver retreated, while industrial metals were mixed with copper and nickel down at least 0.3 percent in London, and zinc jumping 0.7 percent.

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