By Cynthia Lin
U.S. Treasury bonds started the week under pressure, giving back some of the gains made late last week as investors continue to gauge when the Federal Reserve will tighten policy.
In early New York trading, benchmark 10-year notes lost 14/32 in price to yield 2.183%, according to Tradeweb. The 30-year bond declined 1 3/32 to yield 2.985%, while two-year notes pulled back 2/32 to yield 0.71%. Bond yields rise when prices fall.
Monday’s losses came after a sharp rally at the end of last week after the Federal Reserve announced its decision to leave its policy rate near zero.
While investors were divided going into the announcement over whether the central bank would lift rates or stand pat, the surprising aspect of the Fed’s decision was how it was accompanied by increased concerns about global conditions impacting the U.S. economy, many analysts said. That spurred a rally in Treasurys that dragged the 10-year yield as low as 2.125% on Friday.
With the Fed holding off, bond traders say that means another six weeks of gauging economic data and debating when the Fed will lift off. The central bank is scheduled to deliver its next policy statement on Oct. 28.
“Monetary policy expectations continue to be refined,” said Ian Lyngen, a government bond strategist at CRT Capital, adding that this should keep U.S. Treasurys trading in a range.
Indeed, while the Fed’s accommodative policy continues to support Treasurys, a policy tightening this year remains a possibility.
Over the weekend, San Francisco regional Fed President John Williams and St. Louis Fed President James Bullard delivered speeches that suggested last Thursday’s decision not to increase rates was a close call, and that economic conditions could still very well warrant policy tightening before the end of 2015.
Since the Fed’s announcement, the economics teams at J.P. Morgan and Bank of America Merrill Lynch, which previously called for a September rate increase, have shifted their expectations to December, noting that there isn’t enough data between now and the next meeting in late October to gain additional confidence about the U.S. economy.
While the December camp has grown, there are also some market participants who believe the Fed won’t tighten policy until 2016. RBS shifted its call from September to March 2016, saying it “suspects the Fed has missed its window.”
The coming week should offer bond investors more color on policy makers’ thinking, with a heavy lineup of speeches scheduled, including one from Fed Chairwoman Janet Yellen on Thursday.
The Fed “may be going on a communication offensive to help clarify their views on rates and help lift some of the fog lingering in the wake of the September meeting,” said Gennadiy Goldberg, a U.S. rates strategist at TD Securities. “Additional clarification of views could help lift the odds of a 2015 liftoff in rates as many policy makers concede that a 2015 hike remains firmly on the table.”
TD believes the rally in shorter-dated Treasurys sparked by the Fed’s decision may have gone too far, especially if policy makers continue to keep expectations alive for a move this year.
For now, bond traders say the Treasurys market will face pressure from a batch of bond sales. The U.S. government is scheduled to sell two-year notes on Tuesdays, five-year notes on Wednesday and seven-year notes Thursday.
Write to Cynthia Lin at cynthia.lin@wsj.com
