The yield on the benchmark 10-year Treasury note fell to its lowest level since January 2018 on Thursday, a day after the Federal Reserve held interest rates steady and suggested it will keep rates the same for the rest of the year.
The Fed also downgraded its economic forecast for the U.S. economy and said it plans to end its program of reducing the bonds and mortgage-backed securities it holds on its balance sheet. Investors viewed the move — and subsequent comments from Chair Jerome Powell — as more restrained than expected.
The 10-year yield held lower at 2.519 percent after sinking 8 basis points in the prior session, while the yield on the 30-year Treasury bond was also lower at 2.957 percent. The yield on the 3-month Treasury bill, more sensitive to changes in Fed policy, was up at 2.478 percent, higher than the rate of return on both the 2-year Treasury note and the 5-year Treasury note.
"I think that it's a mistake to characterize this as the Fed chickening out, or bowing to political pressure, or being spooked by the market. The story is that the Fed is rethinking their medium-term goal," said Ethan Harris, head of global economics research at Bank of America Merrill Lynch. "The latest move confirms that [the market] wasn't the No. 1 thing because it has recovered and the Fed is still dovish."
The two-day move in Treasury yields signals both just how much inflation expectations have receded and how the Fed's thinking on their 2 percent average inflation goal has changed in recent months.
"They've had an internal debate about their inflation target and its now moving into the public eye. They're seriously thinking about revising the way they think about the target," Harris added. "If you're going to average inflation targets, you're going to have to overshoot in good economic times."