By Min Zeng
U.S. government bond yields fell to their lowest level in more than two weeks on Monday, extending last week's slide as the Federal Reserve soothed worries over a big rise in yields.
The yield on the benchmark 10-year Treasury note was 2.472% late Monday, compared with 2.5% Friday. It was the yield's lowest close level since March 1. Yields fall as bond prices rise.
Bond yields had jumped earlier this month with the 10-year yield rising above 2.6% as investors anticipated the Fed would raise short-term interest rates. The Fed acted as expected last Wednesday, but its signal of a gradual path of tightening has attracted buyers back to the bond market.
Derivative markets suggest investors are expecting bond-market fluctuations to stay contained. The Bank of America-Merrill Lynch MOVE Index fell to 60.4 last Thursday, its lowest since October. The index tracks trading in derivatives on Treasury bonds and measures the size of expected government-bond price swings over a certain period.
Some traders expect the 10-year yield to trade between 2.4% and 2.6%.
"The bond market seems to be stuck here," said Anthony Cronin, a Treasury bond trader at Société Générale SA. "The next rate hike is at least a few months away."
Wagers on higher bond yields, or short bets, have pulled back lately. When investors dial back shorts, they return to the bond market as buyers, which helps send yields lower.
Hedge funds and money managers accumulated a net $89 billion worth of shorts for the week that ended March 14, a day before the Fed's rate decision, via Treasury futures, according to TD Securities. That was down from $93.9 billion a week earlier. The net shorts reached $100.7 billion in early January, the highest since 2008.
Fed-funds futures, used by hedge funds and money managers to bet on the Fed's policy outlook, priced in 58% that the Fed would raise rates again at its June meeting, according to CME Group.
The odds for a rate increase by the Fed's September meeting were 80%, suggesting that many expect the Fed could wait until the third quarter to raise rates again.
A number of Fed officials are scheduled to speak this week, including Fed Chairwoman Janet Yellen on Thursday.
Some analysts caution that markets may be complacent to the risk of a more aggressive tightening path from the Fed, a case that would rattle the bond market and cause a sharp rise in yields.
Even as inflation data have pointed to upticks in consumer prices, the latest University of Michigan consumer sentiment survey Friday showed inflation expectations over the next five to 10 years hit a record low earlier this month. The survey bolstered demand for Treasury bonds Friday.
Inflation is the big threat to long-term government bonds. Higher consumer prices reduce the real purchasing power from bond investments.
Deepa Majmudar, money manager at J.P. Morgan Asset Management, warns that some investors may underestimate the risk of inflation in the longer term.
To hedge against inflation risk, she has been holding Treasury inflation-protected securities, a popular asset class for investors looking for inflation protection.
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