Fed Chairwoman Janet Yellen said Thursday at a press conference following a two-day policy meeting: “Developments that we saw in financial markets in August, in part, reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the deftness in which policy makers were addressing those concerns”. The pickup in front-end lending rates may be indicative of market participants readying themselves for the onset of tightening around the corner.
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In late-afternoon trading, the yield on the benchmark 10-year U.S. Treasury note was 2.130%, compared with 2.215% Thursday and 2.183% a week ago. The two-year maturity fits neatly into the “medium term” time frame that central banks typically target when setting policy parameters. The Fed has held its overnight rate at current levels since the depth of the financial crisis in December 2008. In addition, lower oil prices and a strong dollar are not helping the FED in lifting inflation expectations, and therefore policy makers have always stated that an evident uptrend in wage growth would be a key condition for any interest rate increase.
Fed officials signaled that a rate increase before the end of the year is still on the table, but expectation in the financial markets is growing that the Fed might wait until 2016 to raise rates, which drove buyers into bonds. The odds of a rate increase at the December meeting were 41%.
Some of the biggest bond firms won bets that short-to-medium dated U.S. Treasuries and investment-grade corporate bonds would gain if the Fed backed away from its already lukewarm stance to hike interest rates by year-end.
“This is an ultradovish statement”, said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “Yields are not going to spike given the global uncertainty”. Yields on US Treasuries maturing between 2-30 years were on track to post modest declines for the week.
Barclays U.S. Aggregate bond index, which is the most widely followed USA bond market benchmark, racked up a 0.49 percent gain on Thursday, its biggest one-day rise since early July.
Another appeal to buy long-term bonds: tame inflation.
In fact, as several economists are stating, China may indeed start to negatively affect global growth and inflation, shifting from a growth engine to economic drag, at a time when Europe is still struggling to spur economic and output expansion, and Japan’s aggressive QE programs do not seem to yield the hoped results.
The Federal Reserve decision was of course negative news for the U.S. currency that took a 1.3% dive against the Japanese Yen and lost around 1.2% against the Euro, after declining an additional 0.7% between Tuesday and Wednesday this week.
“Retirement investors should focus on their long-term investment objectives and time horizon to retirement”, GuideStone President O.S. Hawkins said. Traders and analysts said China has sold long-term Treasury bonds following its move to weaken the yuan in August, which had prevented bond yields from falling significantly amid a recent stock-market swoon.
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That said, global bonds have had a rough year.
