Treasuries Fall After Fed's Dudley Downplays Meaning of Pause

  • New York Fed chief says March 31 comments ‘misconstrued’
  • Ten-year yield’s 11-basis-point range is biggest of 2017

Treasury yields rose led by the five-year after New York Federal Reserve President William Dudley downplayed the length of any pause in short-term rate normalization by the central bank when it starts to shrink its balance sheet.

Yields were higher by two to seven basis points at 4 p.m. in New York, with the 10-year higher by 4 basis points at 2.38 percent. Dudley said his March 31 comments that caused bonds to rally and steepened the curve were “misconstrued” by some. Earlier in the session, yields fell to session lows after nonfarm payrolls increased less than forecast in the March jobs report, then immediately rebounded as focus shifted to the unexpected drop in the U.S. unemployment rate unexpectedly to the lowest level since 2007. The 10-year yield’s 11-basis-point daily range was the biggest since Dec. 14.

The yield spread between five- and 30-year Treasuries, which briefly topped 115 basis points moments after the jobs data, retreated to under 109 basis points after Dudley spoke.

  • A pause “at the time you make the decision on the balance sheet” would be to make sure it “doesn’t turn out to be a bigger decision than you thought you were making. So, I would emphasize the words ‘little pause,”’ Dudley said 
  • Eurodollars fell, steepening out to reds (June18-Mar19 expiries); around 20k EDZ8 traded over 10 minutes after Dudley spoke
  • His March 31 comments sparked eurodollars to flatten and reds to outperform on potential for a less hawkish Fed in 2018
  • Before Dudley’s comments, 5s30s flattening was supported by fast-money selling across the belly, along with real-money buying the long end, say traders based in London and New York
  • Goldman Sachs assigned higher odds to a June rate hike (70% from 60%) based on “sharp drop in the unemployment rate and an underlying pace of payrolls growth that is still strong enough to remove additional slack from the labor market,” economists led by Jan Hatzius write in note
  • 5s30s remains higher on the week by about a basis point, having steepened more than 2bp on April 5 after minutes of March FOMC meeting indicated most participants supported beginning to shrink the Fed’s balance sheet via slowing reinvestment later this year
  • Steepening also was supported by approach of next week’s three-, 10-, 30-year auctions
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