Yields on US treasuries fell on Wednesday as the market headed toward a statement from the Federal Reserve. The rise in the price of the bonds, bond prices move directly opposite to yields, was blamed on worries about Greece’s impending default. Investors are flocking to US debt in order to keep their capital safe from a renewed crisis in Europe.
Janet Yellen was expected to release the Fed’s statement on the economy at 2 PM Eastern Time and appear for a press event shortly afterward. The market is not expecting interest rates to rise this time around, but traders will be searching for clues about the attitude of Yellen and the rest of the board toward a rate rise later on this year.
Treasuries see capital flight
The yield on the 10 year treasury hit 2.315% on Wednesday morning, down from Monday’s 2.358%. A $25 billion sale of new bonds by the US government on Tuesday saw strong demand from investors. The bonds were sold at a yield of zero meaning that the US was able to get $25bn at no cost to itself.
Investors are looking for safety in a more risky global climate. A German bond sale on Wednesday saw strong demand and yields on the nation’s debt slipped to 0.80 percent.
Investors may be driving the price of US Treasuries lower in the short term, but in the medium term they’re worried about a drop in prices related to a Fed rate hike. $2.732bn has been pulled out of US funds targeting US Treasuries in the last three weeks according to fund-tracker Lipper.
Janet Yellen sets up rate hike
Meanwhile Janet Yellen’s statement this afternoon is expected to give investors good info on whether a rate rise will happen this year. The Fed is forecast to increase rates in September by several analysts and strong jobs data in May, combined with higher expected inflation, is likely to support that.
A crisis in Europe, which could hurt markets around the world, could be cause for pause on that rate hike. The US economy is likely to sputter if demand from Europe drops in any significant way.
“If there is a big sovereign-debt spillover, or a big hit to U.S. equity markets, then they will not raise rates,” David Keeble, an analyst at Crédit Agricole told the Wall Street Journal today. He added that the Fed was probably going to look for an end to the Greek crisis, or at least more information on it, before deciding to increase rates.
The IMF recently said that if the US were to raise rates it could hurt the economy of the world as a whole. The organization called on Janet Yellen to risk higher inflation in the US in order to secure longer term growth across the globe.