Bond market looking for bad news from Fed

Treasuries rose as investors speculated that Federal Reserve officials will lower their economic-growth forecasts while continuing to reduce monetary stimulus at the conclusion of today’s policy meeting.

Yields on two-year notes, more sensitive to changes in expectations for interest-rate policy than longer-maturity debt, declined from the highest level since September reached yesterday after a report showed consumer prices rose more than forecast last month.

“The market got a little ahead of itself yesterday with the strong inflation data and more bearish expectation toward the Fed, but the Fed needs to see more to change direction,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “The Fed is not at a point where they will be talking about raising rates any time in the near future.”

The 10-year note yield fell two basis points, or 0.02 percentage point, to 2.63 percent at 10:08 a.m. in New York, according to Bloomberg Bond Trader data. It added six basis points yesterday, the largest gain since June 3. The price of the 2.5 percent note due May 2024 rose 6/32, or $1.88 cents per $1,000 face value, to 98 27/32.

The two-year yield was at 0.47 percent after rising yesterday to 0.49 percent, the highest since Sept. 6.

The Federal Open Market Committee will announce its latest decision today in Washington.

Policy Difference

The extra yield 10-year notes pay compared with their German counterparts widened to 1.25 percentage points as investors awaited the latest Fed policy decision today.

“The market is right to position for a wider yield spread between Treasury and German bund yields,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “The policy divergence between the Fed and the ECB is a key investment theme as the U.S. economic recovery story continues and the European Central Bank is expected to ease policy further.”

The ECB, led by President Mario Draghi, this month set a negative deposit rate for the first time to stave off euro-area deflation. The central bank will start to buy asset-backed securities within a year, according to three-quarters of 33 respondents in a Bloomberg Monthly Survey published on June 16.

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