Treasuries Show Traders Over Yellen’s 6-Month Rate-Boost Comment

Treasury traders have gotten over the jolt from Federal Reserve Chair Janet Yellen’s suggestion in March that the central bank may raise U.S. interest rates as soon as the middle of next year.

Two-year note yields are below where they were on March 19, when Yellen spoke. While the comment sent short-term rates up that month, they moved back down in May as Yellen emphasized the economy isn’t meeting the Fed’s goals. Ten-year note yields rose before the Fed releases minutes of its April meeting that may help investors gauge the factors policy makers will use in deciding when to raise the benchmark federal funds rate.

“It will take a much stronger growth path to convince people we’ll someday have higher rates,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

Shorter-term Treasuries were little changed, with two-year yields at 0.35 percent at 12:41 p.m. New York time, according to Bloomberg Bond Trader data. The rate touched 0.32 percent yesterday, the lowest since March 14. The price of the 0.375 percent security due in April 2016 was 100 2/32.

Benchmark 10-year note yields rose three basis points, or 0.03 percentage point, to 2.54 percent after falling on May 15 to 2.47 percent, the lowest since October. They touched 2.66 percent on March 19, and have averaged 2.72 percent this year.

Thirty-year bond yields increased three basis points to 3.41 percent.

Fed Meeting

The central bank decided at the April meeting to pare bond purchases to $45 billion per month, while reiterating that it will keep the key interest-rate target at almost zero for a “considerable time” after concluding the bond-buying program. The Fed is scheduled to release the minutes at 2 p.m.

Policy makers have maintained the benchmark rate target in a range of zero to 0.25 percent since December 2008 to support the economy.

Yellen told reporters at a press conference after the Fed’s March meeting that interest rates might rise about six months after bond purchases end. Subsequent statements by her and other policy makers tempered speculation on an acceleration of rate increases.

The Fed chief said last week the world’s biggest economy hasn’t fully regained its health.

‘Relatively Slow’

New York Fed Bank President William Dudley said yesterday the pace of interest-rate increases “will probably be relatively slow,” depending on the economy’s progress and how financial markets react.

“If the response of financial conditions to tightening is very mild -- say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December -- this might encourage a somewhat faster pace,” Dudley told the New York Association for Business Economics. “If bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted.”

The difference between yields on five-year notes and 30-year securities increased for a third day and touched 189 basis points, the widest since April 14. It shrank on May 2 to 168 basis points, the narrowest since September 2009. The 2014 high was 223 basis points on Jan. 2.

The yield curve steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

Selling Pressure

“The selling pressure has been consistent,” said Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that trade directly with the Fed. “It’s almost a capitulation of the flattening trade.”

Uneven U.S. economic reports, slower-than-expected growth in Europe and unrest in Ukraine have combined to drive the Bloomberg U.S. Treasury Bond Index (BUSY) up 3.2 percent this year. It dropped 3.4 percent in 2013.

U.S. employment, manufacturing and housing starts have all improved, based on data this month. Consumer confidence ebbed and retail sales lagged behind forecasts, the data showed.

While the Fed considers an exit strategy from extraordinary monetary stimulus, 90 percent of economists in the Bloomberg Monthly Survey predict the European Central Bank will ease monetary policy further at its next meeting in June.

Bank of England policy maker Charlie Bean said yesterday that central banks face potential “potholes” when exiting stimulus.

“I do not expect central banks’ collective management of the exit from the present exceptionally stimulatory monetary stance will be easy,” Bean said in a speech in London. “Market interest rates are bound to become more volatile along the exit path, however well central banks communicate their intentions.”

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey, Kenneth Pringle

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