Long-term Treasury yields moved to new lows for the year today, extending their gains after the Fed's fully anticipated decision to raise the fed funds rate to 6% from 5.75%.
But with the
Federal Open Market Committee
inclined to continue hiking the key short-term interest rate at future meetings, short-term Treasury yields continue to refuse to come down by any significant amount.
The divergent performance of long- and short-maturity Treasuries is once again inverting the Treasury yield curve to new extremes. A massive degree of yield-curve inversion occurred during the last few days of January and the first few of February, but then things stabilized. Now, the curve is getting even more inverted.
This strange order of things is due in part to the fact that the Treasury Department is reducing the supply of long-maturity debt, which has caused the prices of those issues to rise disproportionately, driving their yields below those of short-maturity issues.
But it also reflects confidence that the Fed's interest-rate hiking mission will succeed in keeping inflation from accelerating too much. Short-term yields are closely tied to the fed funds rate. But longer-term yields go up and down with inflation expectations. So the Fed's vigilance at the short end of the market makes investors willing to settle for lower yields at the long end.
The yield-curve inversion -- meaning long-term yields below short-term yields -- "started out as a supply story,"
chief bond market strategist Tony Crescenzi said. "Now I think it's transforming itself into something else."
The FOMC today decided to hike the fed funds rate for the fifth time in the last nine months. The action raises the rate to the highest level since July 1995. The Fed's rate-hiking mission is intended to slow the economy to a pace the Fed thinks it can sustain without threatening to ignite inflation -- something in the neighborhood of 3.5% to 3.75%. During the most recent quarter, the economy grew at a rate of 6.9%, according to the government's latest estimate.
In its statement announcing the move, the committee said it "remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion." That suggests the committee will hike the fed funds rate further in the coming months.
There was little discernible market reaction because most Wall Street forecasters already held that opinion. Prior to today's announcement, the
fed funds futures
contracts listed on the
Chicago Board of Trade
were pricing in another 50 basis points of hiking by September. That did not change, meaning the markets continue to look for two more quarter-point rate hikes in the months ahead.
(The FOMC also hiked the less-important
to 5.5% from 5.25%. The previous three fed funds hikes were also accompanied by discount rate hikes.)
The benchmark 10-year Treasury note ended up 12/32 at 102 20/32, dropping its yield 5.1 basis points to 6.141%, its best close since Dec. 13. The 30-year Treasury bond gained 17/32 to 103 30/32, dropping its yield 3.7 basis points to 5.966%, its best since Aug. 26. But the two-year note ended unchanged, its yield 6.514%, in the middle of the range it has occupied since mid-January.
With the 10-year and 30-year both rallying pretty hard, the difference between their yields moved further off its early-February low. But the differences in yield between the two- and 10-year notes, and between the two-year and the 30-year reached new extremes. The 30-year's yield is 54.8 basis points lower than the two-year's, the largest margin since March 1989. The 10-year's yield is 37.3 basis points lower than the two-year's, also the largest margin since March 1989.
Chicago Board of Trade
, the June
Treasury futures contract gained 8/32 to 96 11/32.
Treasury prices gained in spite of another strong performance by stocks, which is seen as likely to quicken the economy's pulse.
Today's only major economic release had mixed implications for the bond market. The January
report revealed that the trade deficit widened to a new record of $28.0 billion from $24.6 billion in December. A growing trade deficit works to contain the economic growth rate, which the bond market likes. But the reason why the deficit widened -- imports rose 1.7% -- is indicative of very strong demand on the part of U.S. consumers.
Also today, the
BTM/Schroder Weekly Chain Store Sales Index
rose a scant 0.1%, while the year-on-year pace dropped from 2.4% to 2.0%, a new two-year low.
Redbook Retail Average
fell 0.1% during the first three weeks of March compared to February. Its year-on-year pace of 1.1% is also a multiyear low.
Currency and Commodities
The dollar gained against the yen and the euro. It lately was worth 106.89 yen, up from 106.43 yesterday. The euro was worth $0.9640, down from $0.9730. For more on currencies, please take a look at
Currency Watch column.
Crude oil for April delivery at the
New York Mercantile Exchange
fell to $28.00 a barrel, its lowest since early February, from $29.43.
Bridge Commodity Research Bureau Index
rose to 213.72 from 212.92.
Gold for April delivery at the
rose to $290.40 an ounce from $286.50.