U.S. Government Bond Prices Tick Higher Ahead of Fed Decision
19 December 2018 - 3:58AM
Dow Jones News
By Sam Goldfarb
U.S. government-bond prices edged higher Tuesday, as traders
responded to swings in stocks and looked ahead to the Federal
Reserve's policy decision on Wednesday.
In recent trading, the yield on the benchmark 10-year U.S.
Treasury note was 2.843%, according to Tradeweb, compared with
2.857% Monday.
Yields, which fall when bond prices rise, declined overnight as
stocks dropped in Asia and Europe to the benefit of safer assets.
They perked up near the start of U.S. trading as U.S. stock indexes
bounced back from sharp declines Monday but still struggled to
climb back to closing levels from a day earlier.
Tuesday's moves followed the pattern of recent sessions, in
which trading in Treasurys has largely been dictated by the stock
market, as investors await the end of an eagerly-anticipated Fed
meeting.
Federal-funds futures, used by investors to bet on the direction
of interest rates, showed Tuesday morning a 75% chance that the Fed
will raise interest rates for the fourth time this year on
Wednesday, roughly unchanged from Monday and a week earlier.
While that shows investors are largely expecting a rate
increase, it indicates greater uncertainty than has been the case
heading into other meetings this year. Beyond the rate decision,
investors have also gamed out a range of scenarios by which the Fed
could communicate its plans for next year.
Most are anticipating at least a slowdown in rate increases. In
recent months, a series of Fed officials said that benchmark rates
are close to a so-called neutral level, in which they would neither
slow nor speed up the economy. That has led to speculation that the
Fed could stop raising rates and wait for signs of accelerating
inflation before moving again.
One challenge for Fed officials could be signaling a shift
toward more cautious monetary policy without communicating too much
concern about the economic outlook, analysts said.
Gary Pollack, head of fixed-income trading at Deutsche Bank AG's
private wealth management unit, said he is looking for Fed Chairman
Jerome Powell to say that the interest rates may have already
reached a neutral level to give a clear signal that the central
bank is no longer going to tighten monetary policy in a
predetermined fashion.
That, he said, "would ease a lot of concerns in the
marketplace."
Shifting expectations about the outlook for interest rates and
inflation have had a large impact on Treasurys in recent months,
dragging the 10-year yield down from around 3.25% in early November
and shrinking the gap between long and short-term Treasury
yields.
The gap between 10-year and two-year yields, known on Wall
Street as the 2-10 spread, settled Monday at 0.155 percentage
point, down from around 0.3 percentage point in early November.
Investors closely watch the 2-10 spread because the two-year
yield has exceeded the 10-year yield before every recession since
1975, a phenomenon known as an inverted yield curve.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
December 18, 2018 11:43 ET (16:43 GMT)
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