U.S. Treasury debt prices rose on Monday after the withdrawal by Lawrence Summers for consideration as chairman of the Federal Reserve eased fears of more aggressive monetary policy tightening if he were to head the U.S. central bank. Bond yields fell to their lowest this month, led by that on the five-year note, which fell as low as 1.55 percent.
The interest rate on one-month bills dipped below zero. The rally faded, however, as investors looked ahead to the Federal Reserve's announcement on Wednesday after a two-day policy meeting, when the Fed is seen as likely to announce it will reduce the size of its bond-purchase program.
The surprise withdrawal on Sunday by Summers, a former Treasury secretary and former top economic aide to President Barack Obama, came two days before Fed policymakers meet and coincided with the fifth anniversary of the collapse of Lehman Brothers. It was widely perceived as positive for bonds as well as stocks.
Traders now expect the Fed's vice chair, Janet Yellen, will be the front-runner to succeed Ben Bernanke, whose term expires in January. It is expected that Yellen would continue the Fed's likely slow, cautious approach to reduce its bond-buying program, which is designed to stimulate the economy.
"Assuming Janet Yellen moves to the fore, it should reduce uncertainty across markets, increasing the likelihood of continuity at the Fed and an ultra-smooth transition," said Robert Tipp, chief investment strategist with Prudential Fixed Income in New Jersey. A Yellen-led Fed would also likely mean the U.S. central bank will take its time to raise short-term rates, even after it halts QE3.
Fed policymakers will meet on Tuesday and Wednesday, when Wall Street analysts anticipate they will decide on shrinking their current monthly $85 billion in purchases of Treasurys and mortgage-backed securities. Given the sluggish pace of the economic recovery, the Federal Open Market Committee, the central bank's policy-setting group, will likely opt for a small reduction in purchases, according to economists and traders.
"A small tapering is in the offing, something in the order of $10 billion. That's still a lot of stimulus coming to the economy," said Kevin Giddis, head of fixed income capital markets with Raymond James in Memphis, Tennessee. Monday's data on industrial output and regional manufacturing suggested the U.S. economic recovery could manage with less Fed stimulus.
News of Summers' withdrawal for consideration as Fed chairman was mitigated by a pact between the United States and Russia to secure and rid Syria of its chemical weapons under international supervision. Fears over a possible U.S. military strike against Syria had stoked safe-haven demand for bonds.
The rally also showed signs of exhaustion in the afternoon, with benchmark 10-year notes erasing most of their earlier price gains and 30-year bond prices falling.
Benchmark 10-year were last up 3/32 in price to yield 2.875 percent.