U.S. Treasuries yields fell to two-week lows on Thursday, a day after the Federal Reserve struck a more dovish tone than expected at its June meeting, reassuring investors that the U.S. central bank will remain accommodative for some time.
The Federal Reserve on Wednesday expressed confidence the U.S. economic recovery was on track and hinted at a slightly more aggressive pace of interest rate increases starting next year, but added that a recent uptick in inflation was not a concern.
Stronger-than-expected consumer price data on Tuesday had led some investors to expect the Fed would hint towards interest rate hikes sooner than had been previously expected.
"There was some hope that they would be more hawkish, but they are ignoring the uptick in inflation," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. Now "people are adjusting their positions."
The inflation increase may, however, help the Treasury sell $7 billion in new 30-year Treasury Inflation-Protected Securities (TIPS) later on Thursday.
Benchmark 10-year notes <US10YT=RR> rose 1/32 in price to yield 2.59 percent, down from 2.62 percent late on Wednesday. Five-year notes <US5YT=RR> gained 1/32 in price to yield 1.67 percent, down from 1.72 percent.
The longer-dated yield curve also continued to steepen as investors unwound bets on further flattening and added positions for more steepening. The curve between 5-year notes and 30-year bonds <US5US30=TWEB> steepened to 175 basis points, up from five-year lows of 165 basis points on Monday.
Two-year note yields <US2YT=RR> fell to 0.44 percent, from 0.48 percent on Wednesday.
"When Janet Yellen restated that short-term rates will stay lower well after tapering ends it was somewhat reassuring," said Jim Kochan, chief fixed income strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
Many investors have anticipated rates will rise as the economy gains momentum but the selloff hasn't yet happened, with 10-year yields stuck in a relatively small range between around 2.40 percent and 2.80 percent since late January.
"Yields are sustainable only if investors are convinced that short-term rates aren’t going up anytime soon," said Kochan.
The Fed bought $2.51 billion in notes due from 2022 to 2024 on Thursday.
The Treasury said it will sell $94 billion in new two-year, five-year and seven-year notes next week.
Source: Reuters
