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Treasuries gain as Fischer says rate rise won't be predictable

Tuesday, March 24, 2015 - 06:25
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Treasuries advanced after Federal Reserve vice chairman Stanley Fischer said that while higher interest rates are warranted this year, economic developments will guide the pace and extent of increases.

[NEW YORK] Treasuries advanced after Federal Reserve vice chairman Stanley Fischer said that while higher interest rates are warranted this year, economic developments will guide the pace and extent of increases.

The 10-year note yield was close to six-week lows as Mr Fischer said interest rates "will sometimes have to be increased, and sometimes decreased" during normalization from the zero level. Investors are questioning the sustainability of US economic strength after the Fed lowered its growth and interest-rate assessments last week.

"His speech makes it clear any thought you may have had of a series of consecutive rate hikes is being proven false," said Dan Greenhaus, chief global strategist in New York at BTIG. "They may also reduce rates along the way." The 10-year yield fell two basis points, or 0.02 percentage point, to 1.91 per cent at 4:59 p.m. in New York, according to Bloomberg bond trader data. The yield reached 1.90 per cent on March 19, the lowest since Feb. 9.

The US two-year note yield fell one basis point as the US prepares to sell US$26 billion of the securities on Tuesday.

"A smooth path upward in the federal funds rate will almost certainly not be realized" as the economy will encounter shocks such as the surprise plunge in oil prices or future geopolitical crises, Mr Fischer said on Monday in remarks prepared for delivery to the Economic Club of New York. He said while forward guidance on rates remains important, its role may diminish.

In lowering its assessment of the economy, the central bank last week said growth has "moderated somewhat." Export growth has slower amid dollar strength and the housing recovery remains slow, according to the Fed statement after the March 17-18 policy meeting.

The central bank cut forecasts for its benchmark interest rate during the next two years, lowering the federal funds rate at the end of 2015 to 0.625 per cent from December's estimate of 1.125 per cent, according to the Fed statement.

"If you were concerned about the Fed moving on the early side, Fischer's comments today didn't make you any more worried," said Thomas Simons, a government-debt economist in New York at Jefferies Group, one of 22 primary dealers that trade with the Fed.

The Fed will raise the rate in about 6.8 months, based on a model using fed funds futures contracts by Morgan Stanley. The gauge rose as high last week as 7.2 months on Wednesday, after Fed officials slashed forecasts.

The Fed has held its target for the federal funds rate at virtually zero since December 2008 to support jobs and economic growth.

Demand for government debt was bolstered earlier as Germany and Greece try to eke out a bailout deal to save the struggling Greek economy.

The U.S. is scheduled to sell US$35 billion of five-year notes and US$13 billion in two-year floating-rate notes on March 25 along with US$29 billion of seven-year notes the following day.

There's still an "influx of cash in the bond market," said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. Treasuries will draw "steady demand" from overseas accounts, he said.

BLOOMBERG

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