BOND REPORT: Treasury Yields Jump After Fed Signals Support For Another Rate Hike
September 20 2017 - 3:48PM
Dow Jones News
By Sunny Oh
Twelve out of 16 of the Fed's interest-rate setting body would
like to see another rate increase this year
Treasury prices fell and yields across the board rose on
Wednesday after the Federal Reserve's policy statement revealed
most of the central bank's rate-setting committee that wanted to
see another rate hike in 2017, despite tepid inflation data in the
past few months.
The Fed kept its benchmark interest rate unchanged between 1% to
1.25%, but said it would begin its historic wind-down of the
central bank's $4.5 trillion balance sheet in October.
Taken together the asset-portfolio reduction and further
increases to interest rates are likely to tighten monetary policy,
pushing borrowing costs up and encouraging traders to sell existing
bonds in anticipation of richer yielding bonds in the future.
See: Fed decision and Janet Yellen press conference--live blog
and video
(http://blogs.marketwatch.com/capitolreport/2017/09/20/fed-decision-and-janet-yellen-press-conference-live-blog-and-video-2/)
The 10-year Treasury note yield rose to 2.275%, compared with
2.239% on late Tuesday. The 2-year Treasury note's yield climbed to
1.438%, versus 1.401%, while the 30-year bond yield rose to 2.816%
from 2.810%.
Bond prices move in the opposite direction of yields.
Twelve out of the 16 FOMC members said they expected a third
rate hike before the end of 2017.
Wall Street expectations for a further rate-increase jumped to a
72% probability in December, compared with 56% chance earlier in
the session and a 31% likelihood two weeks ago, CME Group data show
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/).
Yet, many U.S. central bankers, including New York Fed President
William Dudley
(http://www.marketwatch.com/story/feds-dudley-shows-no-signs-of-wavering-from-support-for-december-interest-rate-hike-2017-09-07),
have recently acknowledged the past few months of lackluster
inflation readings had thrown doubt on the outlook for higher
interest rates. In a news conference, Fed Chairwoman Janet Yellen
echoed this sentiment saying incoming data would decide the policy
path.
Read: Still on course--Fed signals one more rate hike in 2017
(http://www.marketwatch.com/story/still-on-course-fed-signals-one-more-rate-hike-in-2017-2017-09-20)
To support their hawkish stance, Fed officials insisted that
labor markets would continue to tighten, allowing inflation to
eventually pickup.
"That feeds into their party line to hike rates, as long as we
don't have a huge shock in the labor markets," said Victoria
Fernandez, managing director of fixed-income investments at
Crossmark Global Investments. "They have to hike rates to meet
their forecasts, whether they like it or not."
The so-called dot plot, which shows senior Fed officials'
forecasts for interest rates, shifted down to 2.8% from 3% for its
longer-rate expectations. Although this would suggest a more dovish
interpretation to the policy statement, Aaron Kohli, fixed-income
strategist for BMO Capital Markets, highlighted the fact that the
dot plot forecast for 2017 and 2018 had remained intact, instead of
coming down.
Some market participants had anticipated that the policy-setting
Fed Open Market Committee would react to the string of
weaker-than-expected inflation readings by lowering their estimates
of the number of rate increases next year, said Kathy Jones, chief
fixed income strategist for the Schwab Center for Financial
Research.
The balance-sheet reduction announcement on its own attracted
less attention from bond investors as it was telegraphed to a tee.
But many are still uncertain what the portfolio reduction means as
no central bank has attempted to wind down an expanded balance
sheet, a legacy of the battle to stimulate growth in the wake of
the financial crisis and 2007-09 recession.
Some have argued the lack of an initial reaction in the bond
market reflects the slow and even pace of the expected asset
unwind, a process described by Yellen as at its most ideal
tantamount to "watching paint dry." But others feel this shows a
complacency that ignores how quickly the process could
accelerate.
Also read: Why the bond market isn't freaking out from the Fed's
shift to quantitative tightening
(http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14)
"The first $100 billion of balance-sheet reduction may have
little actual effect on the financial system...but, eventually, the
cuts in liquidity will bite," wrote Stephen Stanley, chief
economist for Amherst Pierpoint Securities.
On the economic data front, existing-home sales in August fell
1.7%
(http://www.marketwatch.com/story/existing-home-sales-fall-in-august-for-the-fourth-time-in-five-months-2017-09-20)
to an annual pace of 5.35 million, marking the fourth decline in
five months. Economists surveyed by MarketWatch had expected a
reading of 5.44 million.
Elsewhere, the 10-year German government bond lost 1.5 basis
points to 0.440%.
(END) Dow Jones Newswires
September 20, 2017 15:33 ET (19:33 GMT)
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