Treasuries Whipsaw as Fed Minutes Focus on Fiscal Policy, Dollar

  • Benchmark 10-year notes swing between losses and gains
  • USTs curve steepens relative to earlier in U.S. session

What FOMC Minutes Say About Labor Markets and Rates

Treasuries whipsawed between gains and losses after minutes from the Federal Reserve’s December meeting showed officials focused on a gradual pace of interest-rate hikes, while seeing risks stemming from fiscal policy spurring faster economic growth and a stronger dollar providing a headwind.

The benchmark 10-year U.S. yield fell about one basis point to 2.43 percent at 4:12 p.m. in New York, according to Bloomberg Bond Trader data. It fell as low as 2.43 percent and rose as high as about 2.47 percent after the release of the minutes of the Dec. 13-14 meeting of the Federal Open Market Committee, when officials raised rates for the first time in a year.

The Fed minutes were “less hawkish, but not dovish,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

  • About half of the FOMC participants incorporated an assumption of more expansionary fiscal policy in their forecasts; however, several others pointed out that a further rise in the dollar might continue to hold down inflation
  • At least 2 bearish elements drew focus: the risk of “a sizable undershooting of the longer-run normal unemployment rate” that could force the Fed to raise rates faster, and the possibility that a change to the fed funds rate path “could also have implications for the reinvestment of proceeds” from maturing debt on Fed’s balance sheet
  • The U.S. curve from five to 30 years erased earlier flattening
  • Bonds declined in most euro-zone markets, led by France into the European close 
  • Later this week in U.S. data, December ADP employment change and government’s monthly labor report
  • Fed speeches resume Friday, including Evans, Lacker
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