Much of the selloff in Treasuries this month was linked with a bond rout in Europe. Federal Reserve Chair Janet Yellen reminded investors that further bond losses may ensue from a stronger U.S. economy and central-bank credit tightening.
Ten-year yields rose for the fourth time in the past five weeks as Yellen said in a speech Friday that a federal-funds rate increase will be appropriate this year “if the economy continues to improve.” Government reports this week showed housings starts last month reached a seven-year high and core inflation exceeded forecasts.
“It gives the Fed more ammunition in terms of when they want to hike,” said Aaron Kohli, U.S. interest-rate strategist in New York with BNP Paribas SA, one of 22 primary dealers that trade with the Fed. “After this, I can see the Fed being more aggressive.”
Ten-year note yields rose seven basis points this week, or
0.07 percentage point, to 2.21 percent in New York, according to Bloomberg Bond Trader prices. The benchmark 2.125 percent security due in May 2025 was at 99 7/32. The yield is up 18 basis points this month.
Shorter-term Treasuries, which get hurt most by rising rates, led losses Friday. Bond markets will be closed on Monday for the Memorial Day holiday.
Treasuries have lost 0.9 percent this month, poised for the biggest loss since February, according to the Bloomberg U.S. Treasury Bond Index. The rout in global bonds earlier this month wiped out more than $400 billion in market value.
Yellen said in a speech in Providence, Rhode Island that while the U.S. labor market is nearing full strength, “we are not there yet.”
“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate,” she said.
Traders assign a 27 percent chance that the Fed will raise interest rates in September, according to data from CME Group, up from 24 percent on May 21. The chance that the central bank will raise rates by the end of this year rose to 62 percent from 56 percent.
“We’re going to watch the data in the second quarter,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, a primary dealer. If growth recovers, Fed officials “have got to raise rates this year. They’ve pretty much said they’re going to do that.”
Treasuries had their biggest two-day drop since February on May 18-19 as a report showed April housing starts surged to their highest level since November 2007, rebounding from the first quarter when severe winter weather dented housing-market growth.
Yields rose Friday after a report showed the consumer price index, minus food and energy costs, climbed 0.3 percent in April, the most since January 2013. At a year-over-year rate, core inflation rose 1.8 percent in April, the Labor Department said.
“We had a very, very solid core” CPI number, said BNP Paribas’s Kohli. “This is one of the data points that brings September back into play” for a rate increase, he said.
The Treasury market will also encounter fresh supply as the U.S. will sell $103 billion of coupon securities during the three days starting May 26.