By Min Zeng
Treasury bonds posted the biggest one-day selloff in three
months on Wednesday as comments from Federal Reserve Chairwoman
Janet Yellen renewed some concerns that the central bank may raise
interest rates sooner than many investors anticipate.
The selloff followed a rally a day earlier that had sent the
yield on the benchmark 10-year note to the lowest level in more
than a year. Some traders said Ms. Yellen's remarks, along with
stabilization in Russia's currency from recent turmoil, drove
investors to cash in some chips from the Treasury market.
In late-afternoon trading, the yield on the 10-year note rose to
2.146% compared with 2.07% a day earlier.
The yield rose by about 0.08 percentage point, the most on a
daily basis since September.
When bond yields rise, their prices fall.
The Fed concluded its two-day monetary policy meeting Wednesday
afternoon. In a statement, the central bank continued to signal
patience in raising interest rates. In a subsequent press
conference, Ms. Yellen said the Fed won't raise interest rates for
at least the "next couple of meetings."
The comments raised anxiety in the bond market that a rate
increase could come as soon as the April 2015 policy meeting. That
will be sooner than the second half of 2015 that many investors
currently expect. Ms. Yellen has long been a leading advocate of
keeping interest rates near zero to support the economy.
"The bond market took the comments as more hawkish," said Adrian
Miller, director of fixed-income strategies at GMP Securities LLC
in New York. "The Fed chair is never that specific" in talking
about the timing of interest-rate policy.
Higher interest rates will make newly-issued bonds more
attractive, depressing the value of existing bonds held by
investors.
Demand for ultrasafe Treasury bonds has climbed this year and
picked up more momentum earlier this week. The 10-year yield closed
at the lowest level on Tuesday since May 2013 as the ruble in
Russia hit a record low against the dollar amid market turmoil. The
yield has fallen from 3% at the start of the year.
Global data continued to show faltering economic growth overseas
even as the U.S. economy has gained traction.
Meanwhile, the ripple effects of a prolonged rout in oil prices
continued to shake out in financial markets. Lower oil prices have
hurt the growth outlook in countries where energy exports play a
large role in the economy. Many investors have shed financial
assets in emerging markets and moved cash into haven U.S.
government bonds.
Lower oil prices have soothed concerns over inflation--a main
threat to the value of fixed income assets. Inflation chips away
investors' fixed returns over time. A slower pace of inflation
preserves investors' investments in fixed-income assets.
Earlier Wednesday, a report showed U.S. consumer prices last
month posted a 0.3% drop, the steepest decline on a monthly basis
since December 2008, the latest sign of impact from falling oil
prices. Stripping out energy and food, inflation remains contained,
rising by 0.1% and matching economists' forecasts.
U.S. Treasury debt overall has posted a total return, reflecting
price appreciation and interest payments, of 5.45% this year
through Tuesday, according to Barclays PLC. Over the same period,
the S&P 500 has returned 8.85%, while low-rated corporate
bonds, known as junk bonds, posted a loss of 0.31%, erasing a
strong rally earlier this year.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 99 25/32 dn 3/32 0.609% +4.8BP
1% 3-year 99 26/32 dn 7/32 1.064% +7.2BP
1 1/2% 5-year 99 16/32 dn 12/32 1.604% +7.8BP
1 7/8% 7-year 99 20/32 dn 16/32 1.933% +7.6BP
2 1/4% 10-year 100 30/32 dn 22/32 2.146% +6.6BP
3% 30-year 105 10/32 dn 24/32 2.733% +3.6BP
2-10-Yr Yield Spread: +153.7BPS +151.0BPS
Source: Tradeweb/WSJ Market Data Group
-- Write to Min Zeng at min.zeng@wsj.com