Treasuries climb on Fed rate hike outlook

US Treasuries prices rose for a fifth straight session on Friday, in line with gains in European sovereign markets, as investors continued to snap up US government bonds with the expectation that the Federal Reserve will undertake fewer rate increases this year. US benchmark 10-year Treasury note yields, which trade inversely to prices, had their largest weekly drop since mid-February. US two-year note yields, on the other hand, posted their steepest weekly fall since October 2014.
The Fed's interest rate forecast, or the so-called "dot plots," showed just two rate increases in 2016. In contrast, at the December meeting of the Federal Open Market Committee, the central bank projections showed at least four rate increases for 2016. "This is still a follow-through from Wednesday's announcement from the Fed, but we are now in the re-evaluation stage," said Jim Vogel, interest rate strategist, at FTN Financial in Memphis.
"The market is now figuring out its long-term strategy - where would you want to be on the curve. We're also getting support from another downturn (in yields) in the EU high-grade bond market."
Yields edged lower after the University of Michigan preliminary consumer sentiment index for March came in at 90, lower than the expected reading of 92.2. The rate futures market on Friday showed a 42 percent chance that the Fed will raise rates in June for the first time this year, slipping from 43 percent on Thursday, according to CME Group's FedWatch program.
The likelihood of a second increase by December was seen at 72 percent. "While (the Fed's statement) was obviously dovish, we must emphasize this is a case of the Fed coming more closer in line with what the market was already thinking - newsworthy, yes, but if the market trusted its own opinion it would seem rather a non event," CRT Capital wrote in its weekly closing note. "We note that Fed Fund futures seem a tad aggressive in terms of pricing out hikes."
In late trading, the benchmark 10-year note was up 7/32 in price to yield 1.878 percent, down from 1.902 percent on Thursday. On Wednesday, 10-year yields had touched 2 percent going into the Fed announcement. The 30-year bond was last up 9/32 in price to yield 2.68 percent, from 2.689 percent late on Thursday. US two-year notes were up 1/32 in price, with yields dipping to 0.843 percent from 0.875 percent the previous session and down 0.119 percentage point for the week.