Yields slide more after Fed expects no more rate hikes in 2019

NEW YORK: US Treasury yields fell further on Thursday morning, as the bond market continued the rally that began on Wednesday after the Federal Reserve issued a statement showing policymakers foresaw no further rate hikes for 2019 given the slowdown in the American economy.

In a major shift, the U.S. central bank also expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy. It also said it would halt the steady decline of its balance sheet in September.

The benchmark government 10-year yield, which reflects investor views on the overall health of the economy, fell to a 14-month low on Wednesday but was last down 0.9 basis point to 2.528 percent. The two-year yield, which reflects investor expectations about interest rate hikes, was half a basis point lower from Wednesday when it fell 6.9 basis points; it was last at 2.406 percent.

"The Fed has doubled down on its dovish tilt," said Matt Freund, head of fixed-income strategies at Calamos Investments. "The global economy is clearly softening and the Fed is looking at liquidity conditions."

"Back in Q4 they weren't even talking about developments outside the U.S. and that came up two or three times in the first 10 minutes of (Fed Chair Jerome Powell's) commentary."

In January, the Fed pivoted after hiking rates four times in 2018, pledging patience before making further moves. In February, Fed Chair Jerome Powell also said the central bank would stop shrinking its balance sheet later this year.

Rates are now seen peaking at 2.6 percent, sometime in 2020, roughly a percentage point lower than the historic average for the fed funds rate and a sign that the U.S. economy has entered a more sluggish era.

In contrast to projections through much of last year, Fed policymakers no longer see the need to move rates to a "restrictive" level as a guard against inflation, which remains below the central bank's 2 percent target.

Freund said he understood the Fed to be saying that there were trends - the global economic slowdown, the trade war and more - which gave the bank pause. The added uncertainty of the lagged effects of tightening monetary policy - like shrinking the balance sheet - added to the Fed's case for a "wait-and-see" approach. "If the data picks up - it would be highly unusual - but they do have the room to start hiking again," said Freund.