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Treasury Two-Year Note Skid Reaches Longest Since January

Treasury two-year notes extended their longest losing skid since January as unemployment fell to the lowest level in almost six years, lifting bets the Federal Reserve may raise rates sooner than forecast.

Yields on two-year notes, which are tied to expectations for Federal Reserve policy, rose for a sixth week after the Labor Department said the economy added more jobs than forecast for a third consecutive month. Traders’ expectations climbed to about even money for a central-bank rate increase in June. The Treasury is scheduled to sell $61 billion in coupon debt next week.

“The market has slowly brought forward its expected timing for the first rate hike as the labor market has continued to tighten,” said Jay Barry, an interest-rate strategist with JPMorgan Chase & Co., one of 22 primary dealers that trade with the Fed.

The Treasury two-year note yield rose five basis points, or 0.05 percentage point, on the week to 0.51 percent, after touching 0.52 percent, the highest since Sept. 6, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing June 2016 fell 3/32, or 94 cents per $1,000 face amount, to 99 31/32. The yield has climbed from 0.34 percent since the selloff began.

Benchmark Treasury 10-year yields rose 10 basis points to 2.64 percent this week, while those on 30-year bonds added 10 basis points to 3.47 percent.

‘Underlying Improvement’

Treasuries fell yesterday as the addition of 288,000 jobs followed a 224,000 gain the prior month that was bigger than previously estimated, Labor Department figures showed. The median forecast in a Bloomberg survey of economists called for a 215,000 advance. The jobless rate fell to 6.1 percent, the lowest since September 2008.

Traders now see a 49 percent likelihood that Fed Chair Janet Yellen and policy makers will raise borrowing costs by next June, up from 44 percent July 2 and 33 percent at the end of May, Fed Funds futures show.

JPMorgan Chase & Co. pulled forward its forecast for when the Fed can boost interest rates to the third quarter of 2015 from the fourth.

“The Fed should take notice,” Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “It’s just more evidence that there’s underlying improvement in employment and it’s not quite as dire as Yellen thinks it is. We seem to have definitely turned the corner here.”

Fed Strategy

The Fed said after its June 18 meeting that it will keep the benchmark interest rate at almost zero for a “considerable time” after its bond-buying program ends. It reduced monthly debt purchases to $35 billion, its fifth straight $10 billion cut, and said further reductions in “measured steps” are likely.

Average hourly earnings rose by 0.2 percent for a second month and increased 2 percent during the past 12 months, the Labor Department figures showed, which compared with an annualized rate of 2.1 percent last month.

The consumer price index rose 2.1 percent in May above the level a year ago, the biggest jump since October 2012, another report showed June 17.

Yellen told reporters at her June 18 press conference that the CPI has “been a bit on the high side,” while adding that the recent “data that we’re seeing is noisy.” She said that inflation broadly speaking “is evolving in line with the committee’s expectations.”

The Fed will release the minutes from its June 17-18 meeting on July 9 in Washington.

Treasuries, Bunds

“Given the relatively subdued job creation over the last several years, in order for the Fed to feel compelled to actually raise rates, we would need to see a tangible risk of inflation, particularly on the wage side,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Ten-year yields rose to a 15-year high versus German bunds after the European Central Bank kept interest rates at record lows. President Mario Draghi reiterated that he’ll keep them low as officials try to revive the region’s economy with a new round of emergency measures.

Ten-year Treasuries yielded 135 basis points more than similar-maturity German debt, the widest gap since June 1999, according to closing-price data.

The Treasury will sell $27 billion of three-year notes July 8, $21 billion of 10-year debt on July 9 and $13 billion of 30-year bonds July 10. The $61 billion total for the three offerings will be the smallest for this series of auctions since November 2008.

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