BOND REPORT: Policy-sensitive Two-year Treasury Yield Falls The Most In 11 Weeks After Fed Minutes
May 23 2018 - 3:25PM
Dow Jones News
By Sara Sjolin, MarketWatch , Sunny Oh
Fed signals June hike, but won't be rushed by inflation
Treasurys extended a rally, pulling yields down further, after
minutes released Wednesday from the Federal Reserve's early May
meeting showed the central bank was willing to tolerate a
short-term overshoot of its 2% inflation target.
Yields fell early in the session after investors rushed to buy
havens such as bonds after comments from President Donald Trump
sparked concerns of trade policies that could weigh on global
growth.
What are Treasurys doing?
The two-year Treasury note yield, sensitive to expectations for
monetary policy, slid 4.2 basis points to 2.528%, the largest
one-day yield decline since March 1. Before the minutes' release,
the maturity traded at 2.573%.
The 10-year note yield fell 6.3 basis points to 3.003%, pulling
further away from the seven-year intraday high of 3.125% reached
last Friday. The 30-year bond rate slipped 3.5 basis points to
3.169%, the largest one-day decline since April 27.
Bond prices move in the opposite direction of yields.
What is moving the market?
Investors turned their attention to minutes from the Federal
Reserve's May 1-2 meeting, which was scrutinized for any hints on
the number of rate rises this year. The minutes showed policy
makers thought the Fed was on track for a June rate increase.
But a few market participants said the minutes featured a dovish
tone, as the repeated emphasis that its 2% inflation target was
symmetric suggested that the Fed was willing to allow inflation to
temporarily push above the target without incurring an additional
intervention from the Fed. Members of the rate-setting committee
said an inflation overshoot "could be helpful" in the minutes.
A few policy makers also appeared to play down the importance of
a flattening yield curve as a signal of slowing growth. Analysts
had speculated that the central bank would pause its rate increase
trajectory if the yield curve was in the danger of inverting, a
well-documented recession indicator.
Earlier on Wednesday, investors dashed into assets considered
more safe -- such as U.S. government paper -- after Trump's latest
comments on North Korea and the China trade talks. The president
said late Tuesday there is a "very substantial chance" the historic
meeting between him and North Korea's leader Kim Jong Un won't
happen in June as planned
(http://www.marketwatch.com/story/trump-says-summit-with-north-koreas-kim-may-happen-later-than-scheduled-2018-05-22)
unless Pyongyang meets certain conditions.
See: How this global stock-market selloff shows that Trump still
calls the tune
(http://www.marketwatch.com/story/global-stock-market-selloff-shows-trump-still-calls-the-tune-2018-05-23)
Separately, Trump said Tuesday that he was "not satisfied" with
the latest round of trade talks with China
(http://www.marketwatch.com/story/trump-today-president-suggests-world--class-poker-player-xi-to-blame-for-shift-in-north-koreas-attitude-about-summit-2018-05-22).
Signs of an easing in tensions between the world's two largest
economies has spurred risk-on moves in financial markets earlier
this week, with stocks rallying and bonds selling off.
See:MarketWatch's economic calendar
(http://www.marketwatch.com/economy-politics/calendars/economic)
What's going on in Italy?
The yield on 10-year Italian bonds jumped 5.6 basis points to
2.375% on Wednesday. The rise came as President Mattarella
confirmed the 5 Star Movement and League's choice of prime minister
(http://www.marketwatch.com/story/italy-president-asks-giuseppe-conte-to-form-government-reports-2018-05-23),
put forward on Monday evening.
As one of most indebted economies in the eurozone, a new Italian
government's willingness to widen its budget deficit through tax
cuts and spending boosts have added to concerns over the
creditworthiness of its sovereign paper.
What are strategists saying?
"We didn't get any sense of hawkishness from the minutes. There
was little concern about asset prices, inflation, overheating, and
there's a bit of a dissonance here, there's a market reflecting a
hawkish Fed, and a Fed that isn't hawkish," said John Bellows,
portfolio manager at Western Asset Management.
"The FOMC remains dovish and will continue to go very slow in
raising rates as they won't feel the urge to go more aggressively
even in the face of what is a clear rise in inflation and
inflationary pressures. The symmetry comments give them internal
cover for that," said Peter Boockvar, chief investment officer at
Bleakley Advisoy Group.
"The Italian government is not forming like investors thought it
would. They're still lacking a premier to run the country. Then we
have this currency crisis in Turkey, and we have somewhat of a
likelihood the North Korean U.S. summit doesn't go off as planned.
As a result, you have a flight to quality that started from Europe
in both Germany and U.K., which bled into our market," said Tom di
Galoma, managing director of Treasurys trading at Seaport Global
Securities.
(END) Dow Jones Newswires
May 23, 2018 16:10 ET (20:10 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.