U.S. Government Bonds Stronger on Fed Signals
May 25 2017 - 4:05PM
Dow Jones News
By Min Zeng
The U.S. government bond market strengthened Thursday for a
second consecutive session as investors cheered on the Federal
Reserve's signals that its tightening campaign would continue to
proceed in a slow manner to avoid rattling markets.
The yield on the benchmark 10-year Treasury note settled at
2.254%, compared with 2.266% Wednesday and 2.285% Tuesday. Yields
fall as bond prices rise.
The haven bond market strengthened along with higher stocks,
which mirror market moves driven by the Fed's bond buying monetary
stimulus. The S&P 500 stock index hit a fresh record high
during Thursday's session and deepened its rally this year.
Some traders say the prospect of steady bond yields continues to
drive some investors to dial up risk spectra, which has been one of
the factors fueling strong demand for stocks, corporate bonds and
emerging market assets this year.
The Bank of America Merrill Lynch MOVE index, which measures
implied Treasury bond price swings based on options, pointed to
subdued expectation over price swings. The index settled at 54.4058
Wednesday, the lowest level since August 2014, another sign the Fed
minutes released Wednesday afternoon reduced fears over a big rise
in yields.
The Fed's minutes for its May 2-3 policy meeting suggest the
central bank is on track to raise short-term interest rates next
month. But officials signaled they may hold steady if economic
conditions don't warrant a move so soon.
In addition, Fed officials suggested a slow and predictable
manner when they start the process of winding down its large
balance sheet which includes more than $2 trillion worth of
Treasury bondholdings.
Traders and money managers say the release reassures investors
that the central bank would try to avoid a repeat of the "taper
tantrum". U.S. Treasury bond yields soared in 2013 as fears that
the Fed would soon dial back bond buying spooked sentiment. Higher
yields rippled broadly into corporate debt and emerging markets,
causing a record pace of outflows from bond funds, tightening
financial conditions and undercutting the U.S. growth momentum.
"The risk of another taper tantrum is fairly low," said John
Bellows, portfolio manager at Western Asset Management Co. "The Fed
doesn't want to disrupt the economic recovery. The Fed doesn't want
to disrupt markets."
Lower bond yields also reflect a camp of thoughts in the bond
market that after a possible hike in June, the Fed may stand pat
for the rest of the year, say some analysts.
This explained why the bond market didn't sell off even as
financial derivatives linked to bets on the Fed's policy outlook
priced in a large probability that the Fed would pull the trigger
at its June 13-14 meeting.
The idea runs against the Fed's projections in March about two
additional hikes following the March move. Yet some investors say
the Fed may be forced to pause given the uncertainty surrounding
the outlook for the U.S. growth momentum, inflation and fiscal
stimulus.
The consumer-price index excluding food and energy last month
fell below the Fed's 2% target. Matt Toms, chief investment officer
of fixed income at Voya Investment Management, said further signs
of slowing inflation could derail the Fed's rate increase plan.
The 10-year Treasury yield has fallen this year after a big rise
in late 2016. The yield traded at 2.446% at the end of 2016. In
mid-March, it had traded above 2.6%.
Michael Collins, senior portfolio manager at PGIM Fixed Income,
said if the 10-year Treasury yield rises above 2.5%, it would be a
buying opportunity.
Traders say the range bound mentality in the bond market
underscores the difficulty to predict bond yields given the
conflicting signals in both the global economy and financial
markets.
Leading into the year, the consensus trade was to bet that bond
yields would extend the rises in late 2016. But the 10-year yield
has fallen this year, causing hedge funds and money managers to
either unwind or pare back wagers on higher yields. With higher
yield bets no longer a crowded trade, it also reduces the risk of a
big drop in yields unless the stock market suffers a big selloff,
say analysts.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
May 25, 2017 15:50 ET (19:50 GMT)
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