Just the hint the Federal Reserve would end debt purchases that have supported bond prices sent Treasury yields soaring last month to the highest since April, a reaction that is unwarranted if money markets are a guide.
Even as yields rose, overnight index swaps that traders use to speculate on the path of the Fed’s target interest rate for overnight loans between banks signaled that the zero to 0.25% range won’t increase for more than two years. In a bullish sign for bonds, Bank of America Merrill Lynch’s MOVE Index, which tracks the outlook for swings in U.S. government debt rates, shows investors don’t anticipate an increase in price swings.
While investors dumped bonds as minutes of recent Fed meetings showed central bankers raised doubts about whether they need to keep buying $85 billion of debt securities a month to support the economy, the bigger influence on Treasuries is what policy makers say about the path of rates, JPMorgan Chase & Co. data show. Bonds rallied the most last week since August as Fed Chairman Ben S. Bernanke told Congress that it would take a “substantial improvement” in employment to end the purchases.
“The Fed has been very articulate about the direction of short-term rates,” said Krishna Memani, the chief investment officer of fixed-income in New York at OppenheimerFunds Inc., which oversees $80.7 billion. “It is entirely data-driven and nobody expects that data to improve” enough to satisfy the Fed “anytime soon,” he said in a Feb. 27 telephone interview.
Yields on 10-year notes fell 12 basis points, or 0.12 percentage point, to 1.84% last week, the biggest decline since the period ended Aug. 31, according to Bloomberg Bond Trader data. The price of the benchmark 2% note due in February 2023 rose 1 3/32, or $10.94 per $1,000 face amount, to 101 13/32. Memani said he see yields ranging from 1.8% to 2.25% this year. The yield was unchanged at 8:07 a.m. in New York.
Last week’s rally came after yields increased to about an eight-month high of 1.97% on Jan. 4, the day after minutes of the December 11-12 Federal Open Market Committee meeting showed policy makers questioned whether the more than $2.3 trillion of monetary easing since 2008 risked unleashing inflation and fueling an asset-price bubble.
Yields continued to rise, reaching a high of 2.05% on Feb. 20 after minutes from January’s FOMC meeting showed policy makers discussed slowing or ending purchases of mortgage and Treasury debt.