Analysts looking for proof the US Federal Reserve's campaign to lower interest rates is drawing to a close need look no farther than the bond market.
Yields of US Treasuries maturing in two years have risen since Tuesday, when the Fed announced its fifth rate cut this year. The higher yields signal a perception the central bank may already have done enough to revive the economy's growth.
"The market perceives that the Fed may be finished easing" monetary policy, said Lesley Fox, a money-market portfolio manager at Safeco Asset Management in Seattle.
The notion the economy is on the mend is supported by shifts in the Treasury yield curve, a graph of rates on Treasuries from the shortest- to longest-term. The difference in yield on two- and 30-year Treasuries has narrowed more than 1/4 point to 1.4 percentage points Friday from 1.67 percentage points Tuesday.
The gap narrowed after signs that the central bank's actions are working their way through the economy, just as policy makers had hoped.
"It seems fairly obvious to the market that we are seeing the end of the easing cycle," Dan Antonellis, an economist at Briefing.com in Jackson, Wyoming, said.
At the same time, traders grew less worried the Fed's actions cause rising inflation, a prospect that would boost long-term rates. The longer a bond's maturity, the more vulnerable it is to inflation, which erodes the value of fixed future payments.
The curve is still steep, given that two- and 30-year yields were just 5 basis points apart as recently as December. Tuesday's yield gap was the widest in seven years.
This week's gains in Treasuries maturing in at least 10 years suggest that some investors are more confident the Fed won't go too far in its efforts to revive the economy.
The yield on the 10-year note, for example, is 5.4 percent, compared with 5.45 percent before the Fed's rate cut on Tuesday.
Yields on two-year notes, among the securities most sensitive to the Fed's rates, rose to 4.35 percent from 4.29 percent.
Investors say they are still at risk, however. "There's a chance the Fed could over-stimulate the economy," said Safeco's Fox. That's often a possibility when the central bank lowers the target rate for overnight loans between banks, or federal funds, to avoid recession.
At 4 percent, the fed funds target is the lowest in seven years. Since Chairman Alan Greenspan took over in 1987, the Fed has never cut rates so far so fast.
That has prompted some investors to demand higher returns to put their money at risk for longer periods, and some say yields will rise in coming weeks.
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