Fedspeak Can’t Jolt 2-Year Notes From Tightest Range Since 2014

  • Yields steady in September even as officials suggest 2016 hike
  • Treasuries gain as Deutsche Bank concern fuels haven bid

Three central-bank meetings and a barrage of Federal Reserve speakers this month haven’t been enough to nudge Treasury two-year notes out of the tightest trading range since November 2014, a sign investors may be growing more confident about gauging the path of interest rates.

Yields on two-year notes, the coupon maturity most sensitive to Fed policy expectations, have held steady in September even as a slate of Fed officials reiterated this week that the case to raise rates has strengthened. Fed Chair Janet Yellen said in congressional testimony Wednesday that most policy makers expect a hike by year-end, while Kansas City Fed President Esther George said "it’s time" for the central bank to move in an interview with CNBC Thursday.

Volatility gauges show the Treasury market is the calmest in two years after the Fed stood pat at its Sept. 21 meeting, suggesting a hike later this year while paring projections for the long-term path of rates. The European Central Bank and Bank of Japan also maintained stimulus programs this month, bolstering investor confidence that officials worldwide are in no rush to abandon accommodative monetary policy.

"We’ve traded in a range-bound environment,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 23 primary dealers that trade with the Fed. "You can attribute that to central banks keeping rates steady abroad but also to how rates trade in a slow, low-growth environment.”

Safety Bid

Treasury two-year yields fell two basis points, or 0.02 percentage point, to 0.73 percent as of 5 p.m in New York, according to Bloomberg Bond Trader data. Two-year yields have held within a band of 11 basis points this month. The price of the 0.75 percent security due in September 2018 was 100 1/32.

Benchmark 10-year yields fell one basis point to 1.56 percent.

Treasuries reversed earlier losses after a Bloomberg News report said some Deutsche Bank AG clients are paring back exposure to the beleaguered German lender. Traders bid up traditional quality assets including Treasuries, gold and the yen as investors fled financial securities amid concern the Frankfurt-based bank’s woes could spread to counterparties, damping Europe’s fragile economic recovery.

“If you take a step back, Deutsche Bank’s solvency doesn’t seem to be a critical risk yet,” said Ed Al-Hussainy, senior global interest-rate analyst at Columbia Threadneedle Investments in Minneapolis. But “if it does start to happen, it happens pretty quickly, and I’m cognizant of that.”

Bond Volatility

Atlanta Fed President Dennis Lockhart said Thursday in the text of a speech that the central bank is nearing its goals of maximum employment and steady inflation close to 2 percent, leaving the economy primed for an increase in borrowing costs.

Traders assign about a 53 percent chance to a rate hike by year-end, according to futures data compiled by Bloomberg. The calculation is based on the assumption the Fed’s target trades at the middle of the new band after the central bank’s next boost.

The CBOE/CBOT 10-Year Treasury Note Volatility Index fell this week to its lowest level since August 2014. Using similar methodology to the VIX gauge of equity fluctuations, the index tracks options on 10-year Treasury note futures to measure traders’ expectations for volatility in debt prices.

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