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U.S. Two-Year Note ‘Oversold’ in Response to Yellen Rate Outlook

A surge in Treasury two-year yields this month by the most since 2011 is poised to reverse, based on a technical indicator.

A 13-basis-point increase in March pushed the 14-day relative-strength index up to 71, past the threshold of 70 that signals a yield has risen too far, too fast and is poised to decline. Yields climbed after Federal Reserve Chair Janet Yellen suggested this month the central bank will raise U.S. borrowing costs by the middle of next year.

“Short-term rates are oversold,” said Weihan Chen, a bond trader at Hontai Life Insurance Co. in Taipei. “The market is anticipating the first hike will come around the second quarter of 2015. That’s too early. The market is pricing in too hawkish of a view. The short-term rate will start to fall.” Hontai Life has the equivalent of $6.4 billion in assets.

Treasury two-year notes yielded 0.45 percent today as of 2:05 p.m. in Tokyo, according to Bloomberg Bond Trader prices, rising from 0.32 percent at the end of February. It is the biggest monthly increase since March 2011.

The last time the RSI climbed past 70 on Jan. 9, two-year yields went on to fall to this year’s low of 0.29 percent on Feb. 19.

The yield will be 0.3 percent to 0.4 percent by the end of April, Chen said.

Federal Reserve Bank of Chicago President Charles Evans said the central bank will probably raise interest rates in the second half of next year.

“I do tend to think inflation’s going to pick up and that will be the reason why we ultimately raise rates,” Evans, who doesn’t vote on policy this year, said in a Bloomberg Television interview with Betty Liu today in Hong Kong. “My own take is it’s most likely to be in the second half of 2015. If I had my druthers, I’d wait a little bit longer than that.”

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