Treasuries supported by Fed pledge of ‘patiently accommodative’ policy


Government bonds rallied on Thursday after the head of the US central bank stressed there would be no rapid changes to monetary policy for the world’s largest economy.

Federal Reserve chairman Jay Powell, speaking at the Economic Club of New York on Wednesday afternoon, underscored the importance of “patiently accommodative” monetary policy to boost the pandemic-ridden US labour market.

In the US, the yield on the two-year Treasury bond briefly slipped below 0.1 per cent for the first time ever on Thursday, according to Bloomberg data, before steadying at around that level.

Longer-term bonds also rose in price, pushing yields lower. The benchmark 10-year Treasury yield dropped 0.01 percentage point to around 1.4 per cent. In Europe, Germany’s 10-year bond yield dropped by 0.03 percentage points to minus 0.47 per cent. The yield on the equivalent UK bond fell by the same amount to 0.46 per cent.

Prospects for a strong economic rebound later in the year had stoked expectations of higher inflation, encouraging the Fed to dial back its $120bn-plus of monthly asset purchases. The injection has supported global financial markets throughout the pandemic by flooding the system with cash that institutional investors then spend on corporate bonds and stocks.

But Powell also moved to tame inflation expectations on Wednesday by saying that any rise in prices would be transient and unlikely to affect monetary policy while the labour market remained “very far” from being strong.

“This is the Fed signalling they will keep things the same until unemployment gets back to pre-Covid levels,” said Remi Olu-Pitan, multi-asset fund manager at Schroders. “Despite fears of inflation, they are using the labour market to justify very loose policy.”

Market forecasts of US inflation remain elevated as president Joe Biden’s $1.9tn stimulus bill is debated in Congress.

The 10-year break-even rate, a measure of US inflation expectations derived from the prices of inflation-protected bonds, is running at about 2.2 per cent. The gold price, at $1,842 on Thursday morning, has also risen almost 3 per cent in the past week as investors bought the metal as a hedge against inflationary pressures.

“Markets have been worried about inflation but what we now have from the Fed is that this is not their primary concern,” Olu-Pitan said.

In stock markets, Europe’s Stoxx 600 benchmark added 0.2 per cent on Thursday morning, while London’s FTSE 100 gained 0.3 per cent. The dollar, as measured against a basket of currencies, edged fractionally higher.

Brent crude, the international oil marker, fell 0.6 per cent to just over $61 a barrel after the latest industry data showed falling inventories as oil producers look to clear the surplus built up during the pandemic.

Oil prices have been on a strong run through the turn of the year, taking the market to its highest levels since the first weeks of the pandemic.


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