Treasuries Fall on Speculation Growth Will Support Fed Rate Rise

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Treasury 10-year notes fell a second day as investors speculated the U.S. economy is expanding at a strong enough pace to allow the Federal Reserve to raise interest rates this year.

Yields on the securities closed above 1.9 percent for the first time since April 13 after Federal Reserve Bank of New York President William C. Dudley said on Monday he is relatively optimistic U.S. growth will support an increase in borrowing costs this year. U.S. two-year notes, which are most sensitive to changes in expectations for monetary policy, touched the highest yield level in a week.

“Ninety percent of the bond community thinks the Fed is going to raise rates this year,” said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “And anytime the two-year note yield gets near 50 basis points, you start to see people willing to sell two-year notes.”

Ten-year note yields rose two basis points, or 0.02 percentage point, to 1.91 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent note due in February 2025 fell 5/32, or $1.56 per $1,000 face value, to 100 26/32.

Yields on U.S. two-year notes were little changed at 0.52 percent after touching 0.54 percent, the highest level since April 14.

Fed View

While the Fed’s Dudley said U.S. growth after a slow first quarter will likely support a decision to raise interest rates later this year, “it does not mean that U.S. monetary policy will be tight.” He spoke at the Bloomberg Americas Monetary Summit in New York.

Fed policy makers last month were split over whether they would raise rates in June or later, a debate that occurred before disappointing payroll figures for March, minutes of their most recent policy meeting showed. The payrolls results were followed by below-forecast readings for factories, retail sales and jobless claims.

The latest Bloomberg survey published April 16 showed 71 percent of participating economists expect the Fed’s first rate hike in almost a decade to come at its September meeting. That’s up from 32 percent in last month’s survey. The camp calling for a June hike shrank to 12 percent from 45 percent in March.

“People are looking at data to get a better gauge on the Fed,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “It’s really hard to have a conviction on the market given where we’ve been trading.”

Eurodollar Selling

Treasuries also fell amid selling in Eurodollar contracts, with traders specifically citing contracts expiring in September, with an implied yield of 0.44 percent, and in June 2016, with an implied yield of 0.98 percent.

Eurodollars, the world’s most actively traded futures contracts, trade in price terms for an implied yield calculated by subtracting the price from 100. The contracts settle at expiration to the three-month dollar London interbank offered rate and their movements before maturity are based in part by expectations for Fed interest rate policy. Falling contract prices show rising implied yields.

“There’s been a pretty good seller of euro contracts,” said ED&F Man Capital’s di Galoma. “The front end kind of fell out of bed.”

(An earlier version of this article was corrected to show notes fell in the first paragraph.)

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