(Bloomberg) — Treasuries fell, led by short-dated debt, after minutes from the Federal Reserve’s latest policy meeting showed “many” officials questioning whether policy was restrictive enough to bring inflation down to target.
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Yields on two-year notes rose about 5 basis points to 4.88%, shifting the US yield curve to the flattest in more than a month. Ten-year yields rose 1 basis point to 4.43%. The move started earlier in the day after rates on 10-year UK gilts surged following a stronger-than-expected inflation reading in Britain.
Minutes from the two-day Federal Open Market Committee gathering ended May 1 showed that while participants assessed policy was “well positioned,” various officials mentioned a willingness to tighten further if warranted.
Those conversations happened ahead of a US inflation print that showed price pressures cooling for the first time in six months, helping explain the relatively muted response in markets.
“The Treasury market was bear flattening immediately ahead of the release and since the headlines hit the tapes, the price action has remained intact — marginally extending as 2-year yields edged to the highs of the day,” wrote BMO Capital Markets’ Ian Lyngen in a client note. While the minutes struck “a decidedly hawkish tone,” he added, “the trajectory of inflation is now considered less dire than what prevailed at the time.”
Last week’s inflation report prompted a significant repricing in markets as investors piled into Treasuries on expectations of upcoming rate cuts. Traders have since trimmed expectations that the Fed will deliver two rate cuts this year, with swaps now pricing 38 basis points of easing, compared with around 42 basis points seen at the end of last week.
Economists at Nomura Securities revised their forecast for monetary easing in the aftermath of the release of the minutes, writing that “the threshold for rate cuts appears to have risen.” They now see the Fed first reducing rates in September instead of a previous estimate of July.
Earlier in the session, the flattening in the curve extended after a $16 billion sale of 20-year bonds drew yields largely in line with the level immediately before the auction, an indication of solid demand. A block trade priced shortly after the auction was also consistent with bets on a flattening curve.
“The curve can invert more,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “The market is pricing the Fed on hold for longer than necessary, while the risk of the labor market weakness is becoming more likely to break down long end yields.”
–With assistance from Edward Bolingbroke, Naomi Tajitsu and Carter Johnson.
(Updates with Nomura’s call on Fed easing in seventh paragraph)
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