Yellen said the regulator should raise the fund rates in case the broader economy picks up in 2Q16, yet, after unsatisfactory performance in the first quarter at an annualized rate of 0.8%, any realistically expected economic acceleration (likely to 1.5-2.0% year-on-year) would yet be utterly insufficient to allow for tighter monetary conditions. The bond market responded by increasing bearish positions on US debt, however, a perspective of higher rates in the near-term suggests Treasury bonds will recover inevitably, allowing for a profitable capital allocation in US debt at this point.
"There is still tremendous demand for duration (longer-dated bonds) across the globe especially from Europe," John Bredemus of Minneapolis-based Allianz Investment-U.S. said.
10-year Treasury futures for September delivery dropped $3.44 per $1,000 face amount, to 129 11/32, according to Chicago Board of Trade data in their largest slide since at least 18 May. Meanwhile, Bloomberg US Treasury Bond Index slipped 0.10 to 126.59 in effective value, with 52-week return gaining 3.27% at effective yield 1.41%, thus supporting the view there is a window opened to buy into US bonds as US debt has become a slightly more profitable investment opportunity due to lower value and higher yield.
On Friday, Yellen made hawkish policy remarks, suggesting the anticipated next round in monetary tightening is near, attracting thorough investors' attention to the bond market dynamics.
"It's appropriate <…> for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate," Yellen said during her speech at Harvard University. "The economy is continuing to improve <…> growth looks to be picking up."
Yet, with the US housing market faltering, manufacturing sagging, and corporate profits weakening further due to the dollar's strength, a substantial acceleration in broader economy is unlikely any time soon, whilst fear of recession is mounting. US historic average pace of growth is 3.3%, and whilst average growth last year only reached 2.2%, slowing to 1.5% in 4Q15 to 0.8% in 1Q16, even the positive labor market developments are insufficient to propel the US economy to sustainable expansion providing enough ground for a normalization in monetary policies.
"The market wasn't looking for anything from Yellen. It ended up she said something that was a bit hawkish especially for her," Thomas Roth of Mitsubishi UFJ Securities USA Inc. said.
Most bond traders, in turn, have yet to react to Yellen's speech as trading in Treasuries closed early on Friday ahead of the weekend. Trading in US bonds is shut across the globe due to Memorial Day in the US and Spring Bank Holiday in the UK on Monday.
Paradoxically, investors are not anticipating Treasury yields to gain substantially in the longer run amidst of the international situation with zero to negative yields dominating many major overseas bonds. Yet, as yield spread between short- and longer-term US debt papers narrowed, a rebound in 10-year notes' value is the most likely development at Tuesday's open.
