BOND REPORT: 2-year Treasury Yield Posts Biggest One-day Drop In Three Weeks After Fed Raises Rates
December 13 2017 - 4:17PM
Dow Jones News
By Mark DeCambre, MarketWatch , Sunny Oh
The Federal Reserve raised rates for the third time this
year
Treasury prices rose Wednesday, pushing yields lower after a
report on inflation came in line with expectations, but the Federal
Reserve's willingness to hike rates aggressively next year came
into question, with a lack of change to its muted inflation
outlook.
As expected, the Fed decided to raise interest rates for the
third time this year but kept rate projections for 2018
unchanged.
What are Treasury yields doing?
The 2-year note yield , the most sensitive to interest-rate
policy, fell 4.3 basis points to 1.786%, the biggest one-day drop
since Nov. 22. The yield on the 10-year Treasury note slipped 5
basis points to 2.353%. The yield was as high as 2.42% earlier in
the session. While, the yield of the 30-year bond declined 4.5
basis points to 2.738%.
Bond prices and yields move inversely.
What's driving the bond market?
The Fed's policy-setting Federal Open Market Committee raised
short-term interest rates by a quarter percentage point to a range
of 1.25% and 1.5%, the fifth such increase since Chairwoman Janet
Yellen's central bank began raising rates from near zero at the end
of 2015. A lack of changes made to Fed members' projections for
future interest rates, known as the dot plot, kept trading
subdued.
See: Fed lifts interest rates but sticks to go-slow approach as
Yellen era nears end
(http://www.marketwatch.com/story/fed-raises-interest-rates-and-makes-few-changes-to-outlook-ahead-of-transition-to-powell-2017-12-13)
On the data front, the consumer-price index rose 0.4% in
November, matching MarketWatch economists' forecasts. But investors
reacted to the smaller 0.1% gain in the so-called core rate of
inflation that strips out for food and energy. Economists polled by
MarketWatch had predicted core inflation to hit 0.2% this
month.
The dollar and Treasury yields reversed course after rising
earlier in the day, as the data affirmed expectations that the
weakness in inflation would continue, and make Fed members more
cautious about future interest-rate hikes next year. Still,
investors said the tepid reading wouldn't deter the Fed from hiking
rates later Wednesday.
Stubbornly low inflation, running below the Fed's annual 2%
target, has been a focus for bond investors because rising
inflation can diminish the future value of fixed-income assets.
Muted inflation levels have held long-dated bond yields, the most
attuned to shifts in the inflation outlook, in check throughout
2017.
See: Higher gas prices boost inflation, squeeze paychecks in
November, CPI finds
(http://www.marketwatch.com/story/higher-gas-prices-boost-inflation-squeeze-paychecks-in-november-cpi-finds-2017-12-13)
What are market participants saying?
"Today was never really about the hike - that's been in the bag
for a while - it's about what the Fed does next. It's clear that
the Fed thinks it can hike three more times next year. But that's a
forecast that markets don't yet buy, and it's data more than
rhetoric that will ultimately convince investors," said Luke
Bartholomew, investment strategist at Aberdeen Standard
Investments.
"Despite what may be said in the statement and presser today,
the lack of robustness of inflation data very much brings the
continued hawkishness of the Fed into question," said Aaron Kohli,
fixed-income strategist at BMO Capital Markets.
What else is on investors' radar?
Both the Bank of England and the European Central Bank meet on
Thursday. U.K. inflation rose at an annual rate of 3.1% in
November.
What are other assets doing?
The German 10-year government bond yield was at 0.311%, compared
with 0.297% on Tuesday, while the U.K. 10-year bond yield was at
1.215%, versus 1.205% in the prior session.
(END) Dow Jones Newswires
December 13, 2017 16:02 ET (21:02 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.