World Economy

Traders Relieved After Yellen’s Remarks

Traders Relieved After Yellen’s RemarksTraders Relieved After Yellen’s Remarks

The treasuries market got the all-clear from the Federal Reserve to focus its attention closer to home. Two-year yields reached the highest in more than a week after Fed Chair Janet Yellen signaled in a speech Thursday that turmoil beyond US shores may prove less of an obstacle for policy makers than traders concluded after the central bank left its benchmark rate near zero on Sept. 17.

Traders took that as a sign that they can concentrate on the US economy in divining the Fed’s path, and tune out some of the turbulence abroad that policy makers referenced in their Sept. 17 decision.

“They still believe the economy is strong enough to accept these anticipated hikes,” said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co in New York. “Before, there was the view in the market that maybe the Fed was changing their opinion, and that there was some concern about what was going on globally.”

Two-year yields climbed one basis point on the week, or 0.01 percentage point, to 0.69%, after touching the highest since Sept. 17. The 0.62% note due in September 2017 ended the week at 99 27/32.

 Domestic Concerns

Yellen’s remarks brought relief to strategists and traders who were left re-examining their approach to Fed forecasting last week after she cited a range of concerns in explaining the decision to keep the benchmark rate near zero, where it’s been since 2008.

If this week’s trading is any indication, domestic concerns are moving to the forefront.

On Sept. 22, before Yellen’s speech, a global equities selloff sparked a treasuries rally and led traders to reduce the chances of a 2015 increase to 39%, from 49% the day before. The calculation is based on Bloomberg data that assumes the fed funds rate will average 0.37% after Fed liftoff.

 Domestic Precedence

Then on Friday, US developments took precedence. Treasury yields fell from their highest levels of the day after US House Speaker John Boehner announced that he’ll resign from Congress at the end of October. In the eyes of some traders, the move reduces the likelihood of a government shutdown as soon as next week, while raising the specter of a stalemate later in 2015.

Treasuries investors are also looking to the Oct. 2 release of September labor data. The US probably added about 200,000 nonfarm jobs, according to the median forecast of analysts in a Bloomberg survey.

While treasuries were little changed this week, the bond market’s pricing of inflation expectations sank to the lowest since 2009. Fed officials have missed their 2% inflation target for more than three years amid falling energy costs and an appreciating dollar.

Yellen expressed confidence that a portion of the inflation undershoot will wash out as the effects of energy and import prices fade.