Treasuries Post Best Week Since July as Fed Tempers Rate View

  • U.S. 30-year yields fall as Yellen revises down policy path
  • Dallas Fed’s Kaplan says officials ‘can afford to be patient’

Longer-dated Treasuries posted their biggest weekly advance since July as markets readjusted their view to a slower pace of interest-rate increases from the Federal Reserve.

The 30-year bond yield touched its lowest level in two weeks Friday following the central bank’s Sept. 21 decision to refrain from raising rates and reduce the number of hikes it expects next year. The yield difference, or spread, between two- and 30-year securities recorded its biggest weekly decline since August.

The Fed’s subdued view of the global economy is in line with the stance of central banks in Europe and Japan, which have used unprecedented stimulus measures in an attempt to shore up their weak economies. While Fed Chair Janet Yellen reiterated that U.S. policy makers still intended to increase rates this year, she said challenges to the economy have meant the central bank has had to revise “down the rate path,” also known as the dot plot.

“Dot plots show that expectations for 2017 have dropped,” said Daniel Lenz, a market strategist at DZ Bank AG in Frankfurt. “Apart from that, the overall stance by central banks remains expansive. The Fed will surely take into consideration that none of the other major central banks will turn less expansive anytime soon.”

The Treasury 30-year yield rose one basis point, or 0.01 percentage point, to 2.35 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, after falling as low as 2.32 percent. It fell ten basis points during the week, the most since July 29. The price of the 2.25 percent security due in August 2046 was 97 29/32.

Spread Tightens

The spread between Treasury two- and 30-year yields was about 159 basis points, having narrowed nine basis points this week. Benchmark 10-year notes yielded 1.62 percent, down seven basis points in the week.

A gauge of Treasury market volatility dropped to the lowest level since December 2014. The Bank of America Merrill Lynch MOVE Index, which measures price swings in U.S. debt, closed Friday at 59.75.

U.S. policy makers speaking Friday included included Dallas Fed President Robert Kaplan, who said the central bank “can afford to be patient in removing accommodation,” and his counterpart in Atlanta, Dennis Lockhart, who called subdued productivity growth “a bit of a head-scratcher.”

Boston Fed President Eric Rosengren, who was one of the dissenting votes at the bank’s September policy meeting, said in a statement Friday that the Fed’s failure to get back to a strategy of gradual rate increases may threaten the economic recovery.

"I am arguing for modest, gradual tightening now, out of concern that not doing so today will put the recovery’s duration and sustainability at greater risk,” he said.

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