U.S. Treasury bonds strengthened Wednesday as the minutes for the Federal Reserve's policy meeting in April suggested the central bank remains hesitant to raise interest rates anytime soon.
The yield on the benchmark 10-year note fell to as low as 2.23% and recently traded at 2.239%, according to Tradeweb. It had been 2.25% before release of the Fed minutes and at 2.262% on Tuesday.
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When bond prices rise, their yields fall.
Federal Reserve officials meeting in late April doubted they would be ready to raise short-term interest rates by midyear, according to minutes of the meeting released Wednesday.
Fed officials are trying to make sense of a first-quarter economic slowdown. Many at the April 28-29 policy meeting believed temporary factors were holding the economy back. Before they raise rates, they want to be confident growth is on track, unemployment will keep falling and inflation will gradually rise toward their 2% goal.
"There is no sign of a near-term tightening in these minutes," and that encouraged investors to buy bonds, said Jonathan Lewis, chief investment officer at Samson Capital Advisors LLC, which has $7.6 billion of assets under management. "The minutes are a clear declaration of the Fed's concern about the economy. This is a signal to buy Treasury bonds."
Fed-funds futures, used by investors and traders to place bets on central bank policy, showed Wednesday that investors and traders continue to see zero chance that the Fed would raise rates in June, according to data from the CME Group.
Investors see a 23% likelihood of a rate increase at the September meeting, compared with 26% before the minutes. The odds had been at 24% Tuesday.
The timing of a rate increase has been a primary focus of the bond market this year. A major shift by the central bank into a tightening mode would shrink the value of outstanding bonds. The longer the maturity, the bigger a bond's price will decline with a given rise in yield.
Bond investors have benefited from capital gains driven by a decline in bond yields since the start of 2014. But the recent bond-market rout underscores that with bond yields near historical lows, even a moderate rise in yields would chip away the slim interest payments and inflict pain on bondholders.
A mixed bag of economic releases this month has bolstered investors' expectations that the Fed would wait until late this year to act.
Some traders say the Fed could raise rates sooner than investors expect if the growth momentum gains traction, a case that could spark a selloff in Treasury bonds as the rate outlook will be revised.
(By Min Zeng)