Treasuries rally as Fed is less hawkish than feared

Prices of US’s Treasury bonds rallied in late trade on Tuesday as investors breathed a sigh of relief over signs that the Federal Reserve was not yet ready to accelerate the speed of its interest rate rises.
Minutes released yesterday afternoon from the central bank’s last policy-setting meeting in March revealed growing concerns over inflation but suggested that the Fed was not inclined in the near term to start raising rates at more than its current pace.
“Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time,” the minutes said.
Earlier in the day, Treasury prices had fallen as traders feared that policy makers might be ready to initiate more aggressive action on rising prices.
Bond investors largely ignored data showing that the US trade deficit had widened again in February to hit a new record of 61.04 billion dollars.
In late trade in New York, the yield on the 10-year bond fell 6.8 basis points to 4.368 per cent, its lowest since early March. The yield on the two-year note was down 3.4bp to 3.699 per cent.
UK gilt prices fell and yields rose following a disappointing auction of long-dated inflation-linked bonds that received bids worth only 1.52 times the £800m of the 2 per cent 2035 index-linked paper that was offered. But the auction came as the market absorbed news that the Debt Management Office was poised to sell a 50-year linker. By the end of the day, the yield on the two-year gilt had edged back down 0.6bp to 4.595 per cent while 10-year gilt was yielding 4.683 per cent, up 0.2bp.
In the eurozone, government bond prices traded in a tight range for most of the day. The two-year Schatz yield was flat at 2.4 per cent while the 10-year Bund edged down 1.7bp to 3.54 per cent.
Japanese government bond prices climbed higher following a well-received auction of short term paper and as the stock market continued to weaken. Dealers bought Y2,000bn of five-year government bonds with a coupon rate of 0.6 per cent while there was also strong demand in the secondary auction.
Amid heavy volume, the 10-year June JGB contract moved 0.16 higher to 139.55. The yield on the 10-year bond also moved higher, up 2bp to 1.340 per cent.

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