Treasuries gain as Federal Reserve delays raising interest rates

NEW YORK – Treasuries gained after the Federal Reserve held interest rates near zero.

Yields on benchmark 10-year Treasury notes remained lower after the Fed maintained its benchmark interest-rate range. The central bank has held its overnight rate at current levels since the depth of the financial crisis in December 2008. Before the statement’s release, futures showed only a 30 percent chance that the Fed would raise rates this month.

“They would rather wait and see how inflation gets created than move too quickly,” said Thomas di Galoma, head of fixed income rates and credit at ED&F Man Capital Markets in New York, before the statement’s release. “They would have undone a lot of progress if they ended up raising rates.”

The Fed decision leaves in place a vestige of almost seven years of unprecedented stimulus that has seen policy makers pump more than $4 trillion into the bond market in an effort to boost employment and spur inflation. Investors’ focus will turn to the Fed’s next meeting Oct. 27-28.

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The 10-year note yield fell six basis points to 2.24 percent as of 2.03 p.m. in New York, according to Bloomberg Bond Trader data.

The bond market had priced in a more gradual pace than had some Fed officials amid slowdowns in economies from Asia to Europe requiring sustained central-bank accommodation.

Low inflation

While the U.S. job market since 2013 has created jobs at the fastest pace since the late 1990s, tepid wage growth and plunging commodity prices have kept inflation rates below the Fed’s 2 percent target. Bond yields suggest that annual price gains over the next five years will be about 1.2 percent, and a measure policy makers use to assess the following five years shows an acceleration only to 1.8 percent.

Before the Fed’s decision, money-market derivatives indicated investors see a slow pace of tightening in which the fed funds rate will average just 0.69 percent one year from now.

Volatility in currencies, bonds and stocks soared to multimonth highs in recent weeks, threatening the central bank’s well-telegraphed script for tightening policy. Asset-price swings accelerated after last month’s surprise currency devaluation by the People’s Bank of China and an ensuing rout in the country’s stock market.

Extraordinary accommodation

Fed Chair Janet Yellen – who assumed leadership in February 2014 after policy makers had agreed on a process to taper their third round of bond purchases – has spent her time at the helm preparing financial markets for the end of extraordinary accommodation.

In March, the Fed introduced the possibility of a move in 2015. Policy makers said more recently that they intended to act before year-end, assuming continued improvement in the labor market, as they were confident inflation would move back toward their goal.

The benchmark 10-year note yield reached as low as 1.379 percent in July 2012 as persistently slow growth and cascading financial problems around the world – from Japanese deflation to the sovereign debt crisis in Europe – pushed investors into the safest assets.

When the Fed began its previous cycle of increases from 1 percent in June 2004, the 10-year yield was 4.58 percent and the two-year yield was 2.81 percent. When the Fed cut rates to near zero in December 2008, the 10-year yield was 2.51 percent and the yield on the two-year note was 0.73 percent.

Wall Street strategists were divided this week about whether the Fed would raise rates Thursday. BlackRock Inc., the world’s biggest money manager, said markets would be able to handle an interest-rate increase, while Goldman Sachs Group Inc. CEO Lloyd Blankfein said that U.S. economic data don’t support the case for higher rates.

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