BOND REPORT: Treasury Yields Slump After Fed Minutes Show Balance Sheet Talk

By 0 and Sunny OhFeaturesDow Jones Newswires

Treasury yields fell Wednesday after the minutes from the Federal Reserve policy-making panel's meeting earlier this month showed policy makers largely agreed on the notion of moving to begin shrinking the central bank's balance sheet later this year.

The 2-year note , which is especially responsive to changes in Fed policy, declined 0.2 basis point to 1.306%, after having climbed up to 1.340% in midmorning trade. Bond prices move in the opposite direction of yields; one basis point is equal to one hundredth of a percentage point.

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The 10-year note yield declined 1.9 basis point to 2.266%, while the 30-year bond yield lost 1.1 basis point to 2.935%.

Minutes from the May meeting of the Federal Open Market Committee showed there was broad agreement to taper the Fed's $4.5 trillion balance sheet. To do this, they would support a gradual halt to the reinvestment of principal from maturing securities. Though talk of the balance sheet suggested a hawkish tone, analysts said the overall minutes was more mixed. After 3 p.m., the 2-year note fell a further 3 basis points to 1.270%.

"Members generally judged it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory," the Fed minutes said.

Nonetheless, investors ignored the cautious note and considered a June rate increase a near-certainty, with most of the committee's members agreeing a rate increase should happen "soon". The Chicago Mercantile Exchange's FedWatch tool ( traders expected a 83% chance of a June rate increase.

Yields for long-end Treasurys also slumped as investors said the additional monetary tightening from shrinking the balance sheet would depress growth and inflation expectations, which can be bullish for bonds.

"Fed rate hikes coupled with this balance sheet reduction plan, we really don't know how its going to play out," said Greg Peters, senior investment officer for PGIM Fixed Income. "Either way your'e slowing down the economy by doing it, and the fear that is being expressed in the rate markets is the slowdown is too much."

For all the keen anticipation of details on the Fed's balance sheet reduction, the minutes did not make a large splash. Talk of a cap limit for the amount of securities the central bank would allow to roll off helped diminish volatility as investors welcomed clarity on how the Fed would go about tapering its holdings.

"The market isn't necessarily too concerned about how much they're going to be reducing on a quarterly basis, they were more focused on what the process was going to be," said Eric Souza, senior portfolio manager at SVB Asset Management.

See: Fed minutes may quell doubt about a June interest-rate hike (

Strong bidding in an auction of $34 billion of 5-year Treasury notes added to Wednesday's yield decline. The bid-to-cover ratio, a measure of demand, was above average at 2.67. Auctions can affect yields and prices for U.S. government paper in the secondary market.

( the docket for Wednesday night, Dallas Fed President Robert Kaplan will appear at a moderated discussion in Toronto at 6 p.m. Eastern. Shortly after, Minneapolis Fed President Neel Kashkari will join in a town hall discussion in Ashland, Wis., at 6:30 p.m. Eastern.

(END) Dow Jones Newswires

May 24, 2017 17:27 ET (21:27 GMT)