NEW YORK (MarketWatch) — Short-term Treasury yields inched higher Thursday a day after the Fed triggered a massive rally by signaling it intended to raise interest rates at a more gradual pace than the market had expected.
The two-year yield TMUBMUSD02Y, +5.93% rose 1.6 basis points to 0.581%.
Treasury yields move inversely to prices.
The two-year yield shed 10.9 basis points on Wednesday, its largest one-day decline since Dec. 29, 2010, after a plot of Fed policy maker’s expectations for the Fed funds rate implied that the bank would begin raising rates toward the end of 2015, and that rate increases would be more gradual than the market had expected.
Short-term Treasurys are more sensitive to interest-rate expectations, because the Fed funds rate has a greater impact on the real return of shorter-duration debt.
Long-term debt yields extended declines, with the yield on the 10-year Treasury note TMUBMUSD10Y, +0.95% down 1.2 basis points to 1.937%, its lowest level in about five weeks.
The five-year Treasury TMUBMUSD05Y, +2.71% which recorded the largest price gains in Wednesday’s session, was flat Thursday, yielding 1.423%.
Tom di Galoma, head of rates and credit trading at ED & F Man Capital Markets, said that the dovish tone of Wednesday’s Fed news conference intensified demand for long-term debt.
“The perception is the Fed’s going to be on hold, so I better go out and grab some bonds for my portfolio,” di Galoma said.
Conversely, bond investors are ditching unwanted short-term debt that they bought Wednesday to cover soured bets that the Fed’s news conference and statement would send rates higher.
“The Fed disappointed a ton of bond investors yesterday, there were a ton of bets made looking for higher rates, and all those bets needed to get unwound,” di Galoma said.
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