The U.S. sovereign bonds price rallied on Wednesday, pushing the yield on the benchmark 10-year Treasury note to a 1-month low, as investors cheered Federal Reserve Chairwoman Janet Yellen’s cautious stance in raising interest rates.
The 2-Year yield found considerable downward pressure, holding just above the 0.80%-mark, alongside a similar decrease seen in the 10-Year yield, holding just below 1.85%.
In her speech to the Economic Club of New York yesterday, US Federal Reserve Chair Janet Yellen was more dovish than expected and she said that that caution in raising rates is especially warranted and the Fed has considerable scope for stimulus if needed and the central bank could deploy forward guidance and QE if needed. In terms of the outlook for rates, Yellen reiterated that the FOMC expects gradual rate increases in the coming years but noted that the future rate path is necessarily uncertain.
“A dominant theme over the past six weeks has been the decoupling between risk assets and bonds”, says Societe Generale in a note to its clients. The central banks have played a key role, with the dovish tone supporting both risk taking and bonds and Fed’s Yellen was true to her dovish instincts on Tuesday, as she focused on global headwinds.
“A further rally in risk would likely make the Fed less dovish and they see the risk rally running out of steam on its own, and that could support bonds, with signs of fatigue of late in both the oil rally and the dollar with these moves at the heart of the risk complex”, adds Societe Generale.
Another big factor sending U.S. yields lower is the amount of government debt in Japan and Europe is yielding below zero, driven by unconventional monetary stimulus. Therefore, foreign investors see U.S. bonds, which offer one of the highest yields in the developed world, as a bargain.
Lastly, markets now look ahead to a lighter flow of data on Wednesday coming via the ADP employment estimate and EIA weekly crude inventories, followed by a 7-year note auction later in the session.
The material has been provided by InstaForex Company – www.instaforex.com