Treasuries Rally on `Policy Mistake' Concerns as Curve Flattens


(Bloomberg) -- Treasuries surged as the Federal Reserve's decision to raise interest rates for a fourth time this year and signal further tightening, albeit at a reduced pace, stoked concern that policy makers will stifle economic growth.

Benchmark 10-year yields traded below 2.75 percent for the first time since April, while the spread between 2- and 10-year Treasury yields sank to about 11 basis points, not far from the lowest since 2007. Policy makers raised their target rate by a quarter-point, as expected, and revised their so-called dot plot from projecting three hikes next year to two, also as many analysts projected. Yet stocks tumbled as some investors may have been counting on a stronger acknowledgment of recent equities turbulence.

While the Fed lowered the median projection of the 2019 tightening path, it also reduced growth and inflation projections, which fueled speculation the central bank is raising borrowing costs too far, according to Priya Misra, head of global rates strategy at TD Securities LLC in New York.

"I think it's a notion of a Fed policy mistake," Misra said. "The Fed is signaling continued hikes, which is a mistake. The market was already worried about that. Unfortunately the Fed didn't alleviate many of those fears."

Wall Street forecasters had anticipated that the Fed would lower the 2019 median dot. Investor confidence in the Fed's tightening path has crumbled in recent weeks amid tumbling stocks and doubts about global growth.

2020 Signal

Fed funds futures now show about 11 basis points of Fed tightening priced in for 2019, while the central bank projects two quarter-point hikes. The prospect of a rate cut in 2020 is also growing stronger in traders' eyes: The eurodollar futures market is now pricing in around 18 basis points of cuts between December 2019 and December 2020.

Policy makers also lowered where they see the neutral rate in the long run to 2.75 percent.

"Surprisingly, they lowered the long-term dot," said Michael Collins, senior portfolio manager at PGIM Fixed Income. "If the funds rate is going to average 2.80 over the next 10 years rather than 3 percent, that should theoretically lower the 10-year rate. That's a curve flattener in our mind."

Market expectations for inflation also sank. Traders now see an annual inflation rate of about 1.8 percent for the next decade, down from around 2 percent at the start of December.

--With assistance from Edward Bolingbroke.

To contact the reporter on this story: Katherine Greifeld in New York at

To contact the editors responsible for this story: Benjamin Purvis at, Mark Tannenbaum

For more articles like this, please visit us at

©2018 Bloomberg L.P.


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