US Treasury yields extend rise on rate-hike fears
Washington (May 27) 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
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 TMUBMUSD02Y, +4.98% 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 TMUBMUSD10Y, +1.15% 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 TMUBMUSD30Y, +0.25% 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. 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 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. 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 TMBMKDE-10Y, -2.10% 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.