Treasury 2-Year Note Yields Climb as Traders Await Fed Decision

  • BOJ shifts focus of stimulus to controlling bond yield curve
  • Benchmark U.S 10-year note yields touches one-week high

In a day dominated by two of the world’s premier central banks, bond traders are turning their focus to the Federal Reserve after shrugging off the Bank of Japan’s policy tweaks.

Two-year Treasuries fell before the Federal Open Market Committee’s policy statement and Chair Janet Yellen’s press conference, following the BOJ’s policy change to try and increase longer-dated yields. The majority of economists surveyed by Bloomberg expect the Fed to keep its main interest rate unchanged, while futures prices show traders assign about a one-in-five chance to an increase.

“The big surprise would be if there’s a rate hike,”said Piet Lammens, head of research at KBC Bank NV in Brussels. “That would weigh especially on the short end.”

Signs of global and domestic economic fragility have caused Fed policy makers to hold off on raising interest rates since liftoff in December. Economists at most of the 23 primary dealers that trade with the Fed expect officials to refrain again this week while signaling a move in three months is likely. In some ways, short-term rates have already climbed: the U.S. three-month London Interbank Offered Rate is 0.86 percent, up from about 0.6 percent at the start of 2016.

The yield on Treasury two-year notes, the coupon security most sensitive to Fed policy expectations, increased three basis points, or 0.03 percentage point, to 0.8 percent as of 10:29 a.m. New York time, according to Bloomberg Bond Trader Data. The price of the 0.75 percent security due in August 2018 was 99 29/32. The yield is the highest on an intraday basis since Sept. 13.

Treasuries declined earlier along with Japanese government bonds following the BOJ’s policy change to try to increase longer-dated yields and keep 10-year yields around zero percent. The U.S. 10-year yield rose one basis point to 1.7 percent after touching a one-week high.

“Since the 10-year JGB is pegged at zero, that’s actually going to lower the volatility in global yield curves across the world, which is going to keep our 10-year pegged and lower the volatility of that, which presents an opportunity,” Michael Collins, senior investment officer at Prudential Fixed Income, which oversees $652 billion, said in an interview on Bloomberg Television.

Collins said he expects yield curves to flatten as investors flock to long bonds. The difference between U.S. five- and 30-year yields, a measure of the curve, narrowed for a fourth day to 121 basis points, after previously steepening for the longest stretch since 2012.

Japan’s 10-year bond yield climbed three basis points to minus 0.035 percent, after turning positive for the first time since March.

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