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An unwinding of the Trump trade, coupled with the Fed’s ‘dovish rate-rise’ last week, have pulled Treasury yields lower, wiping out two-thirds of the increase that came after several key central bankers made unexpectedly hawkish comments in late February.
The yield on the broad Barclays Bloomberg US Treasury bond aggregate fell on Tuesday to 1.95 per cent, the lowest level since a chorus of regional Fed officials surprised many investors by indicating a March rate rise was on the table.
Remarks from Bill Dudley, head of the New York Fed, and others sparked a sharp sell-off in Treasuries, sending yields from 1.87 per cent to 1.98 per cent a day after his remarks. Yields climbed further to 2.09 per cent by March 13 as investors took an increasingly bearish view on bonds ahead of the March 14 – 15 Fed meeting.
While the Fed did indeed raise its benchmark lending rate for the third time since the end of the financial crisis, it maintained its forecast for three rate rises this year, igniting a rally in US government debt that put downward pressure on yields.
The gains for Treasury prices have accelerated this week as uncertainty grows over whether the White House will be able to push through Congress its plans to repeal and replace Obamacare. The healthcare legislation, which has been met with criticism by many lawmakers in Donald Trump’s own party, is seen by investors to be an important hurdle in passing other legislation, such as a reduction in the corporate tax rate.
If the vote on the bill expected on Thursday is either pushed back or fails, it could make it challenging for Treasury yields to “re-test recent highs”, Francesco Garzarelli, co-head of markets research at Goldman Sachs, said earlier this week.
European bond yields have also been pressured as the Trump trade falters. The 10-year Bund yield dipped 5.2 basis points on Tuesday to 0.405 per cent, marking the sharpest fall in a month and a half. In the UK, gilt yields of the same duration were lower by 7.8bps to 1.17 per cent.