Yields Rise As Traders Eye Possible Shift By The Fed

Washington (Sept 13)   Treasuries declined for a seventh day, the longest slump in more than a year, on speculation the Federal Reserve may delete reference to interest rates staying low for a "considerable time" after it ends bond buying.

Government bonds worldwide headed for their biggest two-week loss in 14 months before policy makers meet Sept. 16-17. There's a 61% chance the central bank will increase its benchmark rate by July 2015, federal fund futures show.

Benchmark 10-year yields rose to the highest level in two months after reports showed retail sales climbed at the fastest pace in four months and consumer confidence increased.

"It's the anticipation about (this) week's Fed meeting and the debate over whether they may change the language," said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. "At the same time, we're seeing pressure on global bond markets. There's a possibility of the Fed moving earlier than previously expected based on expectations for growth."

Treasury 10-year yields rose six basis points, or 0.06 percentage point, to 2.61% at 5 p.m. New York time, according to Bloomberg Bond Trader data. They touched the highest level since July 8 and added 15 basis points last week, the most since the five days ended Aug. 16, 2013.

The 2.375% note due in August 2024 declined 17/32, or $5.31 per $1,000 face amount, to 97-30/32. The last seven-day slide ended June 25, 2013.

The yield gap between two- and three-year securities expanded to 52 basis points, the most since April 2011. The spread has averaged 30 basis points over the past five years.

"The market is pricing in more consistent hikes, but still at very low levels, which is why three-year notes are seeing more weakness than two-year notes," said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that trade with the Fed. "It's a more universal view that the Fed is getting closer to normalizing policy. And we are seeing that reflected in the front end."

The difference between yields on two-year notes and 10-year debt steepened to 2.05 percentage points, the most since Aug. 1.

Bonds have dropped globally, with German 10-year bund yields increasing four basis points Friday to 1.08%, pushing yields up 14 basis points since Sept. 5. Japan's 10-year yield added one basis point to 0.57%, up four basis points last week. The equivalent Australian yield was little changed at 3.61%, still 14 basis points higher last week.

Source:  InvestorsBusinessDaily