Treasuries Rally, Yield Curve Steepens on Fed Balance Sheet Plan

  • Most officials support cutting the $4.5 trillion balance sheet
  • Yield spread between 5- and 30-year debt widest since February

Treasuries rallied and the U.S. yield curve steepened after minutes of the Federal Reserve’s March meeting revealed most officials backed starting to shrink the central bank’s $4.5 trillion balance sheet later this year.

The 10-year yield fell three basis points to 2.33 percent at 4 p.m. in New York, Bloomberg Bond Trader data show. The yield curve from five to 30 years steepened for a fifth straight session, the longest streak since September, to 113 basis points. It’s the widest spread since February. 

“Most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the committee’s reinvestment policy would likely be appropriate later this year,” according to the minutes of the Federal Open Market Committee’s March 14-15 meeting.

Bond traders are also focused on health-care and tax policy in Washington for signs of whether the reflation trade can hold up. House Speaker Paul Ryan said Wednesday that the chances for a vote on a revised repeal of Obamacare this week were dwindling. Congress and the White House had closer agreement on health-care policy than a tax overhaul, he said, according to Reuters.

  • Fed officials added that they generally preferred to phase out or cease reinvestments of both Treasury securities and agency mortgage-backed securities at the same time
  • They said they would renew the discussion of the balance sheet at future meetings
  • “People interpret balance sheet run off to mean less hikes,” said Priya Misra, head of global rate strategy at TD Securities.
  • Private payrolls increased by 263,000, beating the median estimate of 185,000, data from the ADP Research Institute showed Wednesday; it revised February’s gain lower
  • March payrolls, to be released April 7, have historically missed estimates, but the consensus view of 180,000 jobs added may be too pessimistic, according to note after ADP released from John Herrmann at MUFG Securities Americas
  • Fed fund futures continue to price next rate hike in September, with Oct17 implied rate 119bp, in 100-125bp target range

— With assistance by Edward Bolingbroke, and Alex Harris

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