U.S. 10-Year Yield Falls to Fresh 2017 Low
The yield on the benchmark 10-year U.S. government note closed at the lowest level this year on Wednesday as the latest signs of slowing inflation sparked a buying frenzy in the world's biggest bond market.
The yield on the benchmark 10-year Treasury note settled at 2.138%, the lowest close since Nov. 10, down from 2.206% Tuesday. Yields fall as bond prices rise.
Buying was the most hectic during the morning session, with the yield at one point falling to 2.103%. The key catalyst was a report showing the consumer-price index last month was up 1.9% on an annualized base, dipping below the Fed's 2% target again. Excluding food and energy, CPI rose 1.7% over the past 12 months through May, the smallest gain since May 2015.
The report prompted some investors to bet that the Federal Reserve could stand pat during the second half of the year after a rate increase this month.
The bond market's rally eased Wednesday afternoon after the Fed raised short term interest rates as expected but made no change to its rate-hike plan for the rest of this year. This disappointed some bond investors and generated a bout of profit-taking, sending yields off from their session lows.
"The Fed is willing to look through the weak inflation data and sticking to its normalization plan," said Bill Irving, portfolio manager at Fidelity Investments. "Those who had anticipated one hike and done for the year didn't get it from the Fed."
In a press conference following the rate decision, Fed Chairwoman Janet Yellen said it is important not to overreact to a few readings because inflation data can be noisy. Ms. Yellen, though, said rate policy isn't on a preset course, a sign that her view on inflation could change if more data point to downside risks.
The selling following the Fed decision concentrated on short-term Treasurys whose yields are highly sensitive to the Fed's rate policy outlook. The yield on the two-year note ended the session at 1.343%, down from 1.363% Tuesday but off its session low of 1.290%.
As investors sold short-term debt and migrated cash into long-term bonds, the yield premium on the 10-year Treasury note relative to the two-year note fell to 0.80 percentage point Wednesday, the lowest level this year. It was close to 0.75 percentage point last July, which was the smallest premium since 2007.
A shrinking premium is known as a flattening yield curve in the bond market. It is usually interpreted by investors as a warning sign that the growth momentum may be slowing down, leading to diminished inflation pressure.
Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private wealth management unit, said the curve reflects some concerns that the Fed's tightening campaign amid slowing inflation could undercut the growth momentum.
"It could be a policy mistake," he said.
Reflecting his view, Mr. Pollack said he bought some Treasurys earlier Wednesday and that he wouldn't rule out that the 10-year yield could potentially fall to 2% or below especially if inflation continues to ease.
Inflation chips away investors' purchasing power from their government bond investments over time and is a big threat to long-term Treasurys. Demand for long-term bonds rises when investors expect inflation to ease.
Marc Bushallow, managing director of fixed income at Manning & Napier, said the 10-year note at this low level doesn't "provide a lot of value."
Mr. Bushallow said he still expects bond yields to rise gradually over the next 12 to 24 months especially with the Fed moving closer to start unwinding its large balance sheet that includes more than $2 trillion of Treasury debt.
The risk of a big rise in yields, he said, is likely to be low with the Fed's signal of slow and cautious approach in winding down the balance sheet.
The bond market has caught those betting on higher yields wrong-footed this year. The 10-year Treasury yield has fallen from 2.446% at the end of 2016, even as the Fed raised rates three times over the past six months. The bond market is countering against the consensus trade leading into 2017 that yields would extend their climb in late 2016.
A number of factors have sent yields lower instead: growing skepticism toward President Donald Trump's fiscal agenda; disappointing economic releases that raised some question toward the growth momentum; and U.S. Treasurys remain a bargain with their yields remaining higher compared with their peers in Germany, Japan and the U.K.
A massive pool of negative-yielding government bonds in Japan and Europe driven by those countries' unconventional bond-buying monetary stimulus highlights global investors' struggle to get income and drives money flowing into Treasurys. The amount of global negative-yielding sovereign debt outstanding rose to $9.5 trillion as of May 31, from $8.6 trillion on March 1, according to a report from Fitch Ratings Tuesday.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
June 14, 2017 16:44 ET (20:44 GMT)