Bonds rally on safety-bid and dovish Fed
Middle East.
Cash Treasury markets had been closed for a holiday on Monday, so Tuesday morning was traders' first chance to react to Palestinian militants' surprise attack on Israel as well as Fed officials' overnight comments.
After dropping 15 basis points at the open, 10-year yields were 12.5 bps lower at 4.66% at 1235 GMT. Two-year yields also dived more than 13 bps to a one-month low of 4.926% as short-term rate expectations were dialled back.
Yields fall when bond prices rally.
Fed Vice Chair Philip Jefferson and Dallas Fed president Lorie Logan both noted on Monday that the recent run-up in yields may reduce the need for further interest rate hikes.
«If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening,» Logan said.
Analysts at Citi noted Logan has been one of the strongest advocates that the Fed would need to follow through with further tightening, but interpreted her remarks as suggesting that higher long-term rates curtail the need for short-end hikes.
Implied futures pricing has reduced the probability of another rate hike this year from above 40% last week to about 26% on Tuesday, according to CME's FedWatch tool.
The Mideast conflict, already claiming more than 1,500 lives, drove bond yields lower globally on Monday as investors turned to safe-haven assets.
