Overnight drop leaves yields softer after Powell comments on rates

NEW YORK: Treasury yields fell overnight following comments from Federal Reserve Chair Jerome Powell which signaled that an end to the bank's interest-rate hike cycle may be closer than previously suggested, leaving yields lower on Thursday morning.

In overnight trade, the benchmark U.S. government 10-year yield dropped below the psychologically significant 3 percent level for the first time since Sept. 18. It was last down 2.9 basis points at 3.015 percent after having recovered some losses early in the U.S. session.

In a speech that came in the wake of another volatile market selloff, Powell that interest rates are now "just below" estimates of neutral, less than two months after saying rates were probably "a long way" from that point.

The U.S. central bank in 2018 has hiked rates each quarter, and is expected to tighten policy again next month. But signs of a slowdown overseas and nearly two months of market volatility - including a sharp sell-off in equities last week - have clouded an otherwise rosy picture of the U.S. economy.

Across maturities, yields were down between 1 and 3 basis points, with the biggest losses in longer-dated issues, flattening the yield curve after it has steepened sharply yesterday.

The steepening move on Wednesday immediately following Powell's remarks surprised some market participants. The smaller reaction in the two-year yield - which reflects traders' expectations of rate hike increases - was not unexpected as a rate hike in December and an additional hike in 2019 had already been priced into the market. But the bid at the long end was less expected.

"The reaction yesterday may have been a bit overdone in terms of how it shaped the curve. If you want to take that was a dovish presentation, that would be supportive of the belly of the curve, but maybe wouldn't create that much of a steepening. Some people view (this morning) as an opportunity to reverse that," said Michael Lorizio, senior fixed income trader, Manulife Asset Management.

Also on Thursday morning, the Commerce Department reported that U.S. consumer spending increased by the most in seven months in October, but underlying price pressures slowed, with an inflation measure tracked by the Fed posting its smallest annual increase since February.

"This is the lowest in several months, but it is still in a range that the FOMC has been comfortable normalizing policy through," said Lorizio.

"I don't see this month's reading as a reason to step away from normalizing policy or change their overall view of the U.S. economy."