BOND REPORT: Treasury Yields Extend Rise On Rate-hike Fears
May 27 2016 - 4:11PM
Dow Jones News
By Ellie Ismailidou, MarketWatch
Short-term Treasury yields rise for third week
Treasury prices tumbled Friday, pushing yields to log their
largest daily increase since May 18, after Federal Reserve
Chairwoman Janet Yellen said another rate increase may be
appropriate in coming months if the economy continues to
improve.
In remarks at Harvard University, Yellen noted continued
improvement in the labor market, albeit with caveats about sluggish
wage growth and full-time employment. Yellen said that if the
economy overall continues to improve, it would be "appropriate" for
the Fed to "gradually and cautiously increase our overnight
interest rate over time."
See:Janet Yellen says a rate rise in coming months is probably
appropriate
(http://blogs.marketwatch.com/capitolreport/2016/05/27/live-blog-and-video-of-janet-yellen-interview/)
That means a rate rise could be appropriate in coming months,
she said. That was perhaps a stronger statement than investors had
expected. The remarks saw Treasury yields, which move in the
opposite direction of prices, extend an earlier rise.
Short-term Treasury yields, which are most sensitive to changes
in the Fed-funds rate, have risen for three straight weeks on
mounting fears that the Fed might increase interest rates as early
as June.
The two-year Treasury yield gained 4.1 basis points on Friday
and 2.3 basis points over the week to 0.911%, according to Dow
Jones data. One basis point is equal to one-hundredth of a
percentage point.
The yield on the 10-year U.S. Treasury note , the Treasury
market's benchmark, gained 2.8 basis points on Friday and 0.2 basis
point over the week to 1.851%.
The yield on the 30-year bond known as the long bond, rose 2.1
basis points on the day and one basis point over the week to
2.650%.
On Friday, fed-funds futures traders were pricing in a 30%
probability of a June rate increase, slightly down from 34% earlier
this week but significantly higher than a scant 4% just 10 days
ago, according to CME Group's FedWatch tool
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
Investors use the fed-funds futures market to bet on the path of
rising interest rates.
Amid the shifting rate-hike expectations, investors have been
closely watching economic data releases to gauge the central bank's
moves.
On Thursday, short-term Treasury yields posted their largest
one-day drop in nearly a month
(http://www.marketwatch.com/story/treasury-yields-slip-as-investors-snap-up-new-debt-ahead-of-fed-speakers-2016-05-26)as
weakness in core durable-goods orders stoked skepticism that the
Fed would move next month.
But on Friday morning, yields rose again, after first-quarter
GDP was revised up from a preliminary 0.5% reading
(http://www.marketwatch.com/story/first-quarter-us-gdp-raised-to-08-2016-05-27).
GDP is the sum of an economy's output and is therefore one of the
main data points the central bank monitors to determine
interest-rate policy.
Though the headline number was slightly better than expected,
"there was not a lot of significant change from the preliminary
estimate," said Jim Grabovac, senior portfolio manager at McDonnell
Investment Management.
Even if the Fed raises rates in June, long-term yields are
expected to remain subdued, Grabovac said, mainly due to the
significant yield differential between U.S. Treasurys and other
government bonds of similar credit quality, most notably German
bunds.
On Friday, the yield on the 10-year German bond , known as the
bund, inched 0.2 basis point lower to 0.141%. That is 1.7
percentage points lower than the yield on a similar Treasury.
Largely due the relative attractiveness of Treasury yields,
foreign demand for newly issued Treasurys has pushed prices higher
and yields lower at a series of Treasury auctions this week.
"New supply was welcomed by investors who appear unfazed by the
Fed-speak we heard recently. The strength of auctions shows a lot
of investors remain unconvinced that a rate hike is in the cards
for June," said Christopher Keith, fixed income manager at Adviser
Investments.
Also read: What frenzied appetite for 2-year Treasurys says
about rate-hike expectations
(http://www.marketwatch.com/story/what-frenzied-appetite-for-2-year-treasurys-says-about-rate-hike-expectations-2016-05-24)
(END) Dow Jones Newswires
May 27, 2016 15:56 ET (19:56 GMT)
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