(Bloomberg) — Bond bulls were emboldened by the Federal Reserve’s signal that it would keep rates near zero for years to come and continue its bond buying at least at current levels.
The 10-year Treasury yield slid Thursday to the lowest in a week, at 0.71%. Just days ago, it was approaching 1% amid signs the labor market may be bottoming out as pandemic-triggered lockdowns ease.
Fed Chairman Jerome Powell said the central bank would continue to use its “full range of tools.” Policy makers’ “lower-for-longer message” boosted the belly of the curve, while lengthier maturities were still struggling with the weight of government-debt sales to come, said Subadra Rajappa at Societe Generale.
“The statement for the most part was extremely dovish,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global. “The Fed has won the fight so far, as far as supporting the market and making sure this is the shallowest recession we ever had, but they will likely do more.”
The Fed’s latest projections showed all policy makers expect the funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.
A separate statement from the New York Fed specified that the pace of its asset purchases would be about $80 billion a month for Treasuries and about $40 billion of mortgage-backed securities, in line with current levels. The Fed has reduced daily Treasuries purchases to about $4 billion a day, from a peak of $75 billion a couple months ago.
“The Fed maintains its flexibility but will continue to robustly support the recovery for a long time,” Rick Rieder, BlackRock Inc.’s chief investment officer of global fixed income, wrote in a note. “As both inflation data and employment numbers carve out a bottom in the coming months and begin to recover, we think it will continue to be critical for the Fed to focus on bolstering its lending and stabilizing initiatives.”
Powell said policy makers were briefed on yield-curve control, and that the Fed would continue to study the idea as a possible tool. Some Wall Street strategists predict such a policy, of capping yields at specific levels, will happen later in 2020.
The gap between 5- and 30-year yields last week reached the steepest since 2016, touching 129 basis points, in part on speculation that such curve-control policy would tamp down shorter-term rates.
This segment of the curve steepened Wednesday after the Fed decision, by about two basis points to 119 basis points as the five-year maturity outperformed.
“The Fed will likely eventually institute some kind of yield-curve control,” di Galoma said.
(Adds BlackRock comment in seventh paragraph)
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