US Treasury debt yields fell for a fourth straight session on Thursday, a day after the Federal Reserve lowered its expectations for interest rate hikes this year and expressed concerns about the state of global financial markets. Benchmark 10-year note yields fell to one-week lows, while US two-year notes, the maturity most sensitive to Fed rate expectations, slid to a two-week trough.
The spread in the yield between US five-year and 30-year notes increased by about 131 basis points on Thursday, the highest in two weeks. The steeper yield curve suggested that the market has all but priced out any near-term rate hike. "The market was caught off-guard by the (Fed's) very dovish tone, so we're getting this bull steepening," said interest rate strategist Gennadiy Goldberg of TD Securities in New York.
The rate futures market now shows a 43 percent chance that the Fed will raise rates in June for the first time this year, slipping from 51 percent before the central bank's Wednesday statement, according to CME Group's FedWatch. The likelihood of a second increase by December was seen at 73 percent, down from about 80 percent before the Fed announcement. At the December meeting of the Federal Open Market Committee, the central bank projections showed at least four rate increases for 2016. "We will chalk Thursday up to a day of consolidation. We could get cosmic about the action and suggest that there was a re-digestion of the market's broader take on the Fed, that is, they were dovish only insofar as they were less in sync with the way the market was thinking and came closer to that view," wrote CRT Capital in a note.
Meanwhile, the Treasury's 10-year TIPS auction on Thursday saw soft results, with the yield coming in at 0.315 percent, higher than the expected rate at the 1 pm deadline. Indirect bidders, which are largely central banks, took 65.5 percent compared with the norm of 68 percent. In late trading, the benchmark 10-year note was up 12/32 in price to yield 1.894 percent, down from 1.911 percent on Wednesday and 2.0 percent going into the Fed announcement. The 30-year bond was last up 31/32 in price, while yields fell to 2.676 percent from 2.710 percent late on Wednesday. US two-year notes were unchanged in price, with yields dipping to 0.863 percent from 0.867 percent.
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