U.S. Yields That Seem Low Are Higher Than Usual by One Measure

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U.S. government bonds yields look like they’re low, yet they’re higher than usual compared with the Federal Reserve’s benchmark.

Ten-year notes declined on Wednesday, extending the yield over the 0.25 percent upper limit of the Fed’s target for its main interest rate to 212 basis points. The figure is a premium over the average during the past two decades of 145.

Treasury yields have been rising this year, driven in part by investors who spent the first half preparing for the Fed to increase borrowing costs. Employers added the most jobs in May in five months and worker pay accelerated, boosting speculation the economy is strong enough to withstand higher borrowing costs. While Fed chair Janet Yellen and policy makers are scheduled to finish a meeting Wednesday, they probably won’t act until later this year at the earliest, yields indicate.

“Yellen is probably still going to indicate the Fed hike is likely appropriate for this year, and that has Treasuries a little softer,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

Benchmark 10-year yields rose five points, or 0.05 percentage point, to at 2.36 percent as of 11:13 a.m. in New York, according to Bloomberg Bond Trader data. That compares with an average of 4.25 percent for the past 20 years. The 2.125 percent note due May 2025 fell 14/32, or $4.38 per $1,000 face amount, to 97 29/32.

Laying Groundwork

“The differential is going to look historically wide because we are at the point in the cycle when the Fed rate is at the low point and you’re looking at an economy that does appear to be producing growth,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. “It is expected to ultimately show some broader signs of inflation and a Fed that will be undertaking a tightening cycle.”

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since 2008 to support the economy following the recession that began in December 2007 and ended in June 2009.

Fed officials will want to lay the groundwork for a first rate hike in September without triggering a repricing of the tightening cycle in later years, Standard Chartered’s Davies said. The focus of Yellen’s press conference following the interest-rate decision will be on adjusting the front-end of the yield curve, he said.

‘Fairly Hawkish’

Market pricing indicates traders don’t see the rate rising as fast as policy makers do.

Investors expect the rate to be little changed at 0.22 percent in three months and to climb to 0.33 percent in six months, according to data compiled by Bloomberg, suggesting one 25-basis point increase by year-end. The median forecast among Fed policy makers in March was for a rate of 0.625 percent at the end of 2015 and 1.875 percent a year later.

The central bank will be “fairly hawkish,” said Edward Acton, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. RBS is forecasting a rate increase in September.

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