Treasuries fell, with the 30-year bond yield making its biggest two-day gain since 2013, as optimism about a Greek bailout and second day of gains for Chinese stocks cooled refuge demand.
Benchmark 10-year notes extended losses after Federal Reserve Chair Janet Yellen said economic headwinds are receding and the central bank will raise interest rates this year. Futures prices show traders during the past two days have moved forward the projected timing for a central bank move.
“She was a little bit more hawkish than usual,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “She was a little bit more upbeat about the future, and the fact that they could go faster” in raising rates “if things turn out to move along better.”
Thirty-year bond yields rose seven basis points, or 0.07 percentage point, to 3.19 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The 3 percent securities maturing in May 2045 fell 1 10/32, or $13.13 per $1,000 face amount, to 96 11/32.
The two-day yield increase of as much as 23 basis points was the largest since the period ended July 5, 2013. Ten-year note yields added eight basis points to 2.40 percent.
Yields made a brief, sharp retreat from their midmorning highs amid heavy buying in futures. In five-year futures, 37,275 contracts traded between 10:30 a.m. and 10:50 a.m., twice as high as the average from the past five days, according to Bloomberg data.
“The market had deteriorated to the level where, at a 2.40 percent yield on 10-year notes, there was some pretty aggressive buying,” said Thomas Di Galoma, head of fixed income, rates and credit at ED&F Man Capital Markets in New York. “There’s probably some short covering that needed to be done ahead of Yellen’s speech,” meaning that investors were closing out bets that Treasuries would fall, he added.
The Fed has kept its target for the federal funds rate at virtually zero since 2008 to bolster the economy. Yellen said she expects to raise interest rates this year and repeated that the subsequent pace of increases will be gradual, in speech Friday in Cleveland.
She noted two specific drags on the U.S. economy: the strengthened dollar’s impact on exports and the decline in business investment linked to lower oil prices.
“We expect the drag on domestic economic activity from these factors to ease over the course of this year, as the value of the dollar and crude oil prices stabilize, and I anticipate moderate economic growth, on balance, for this year as a whole,” she said.
The probability of a Fed rate increase at its December meeting rose to 67 percent from 54 percent on July 8, according to futures data compiled by Bloomberg. For September, the odds rose to 33 percent from 21 percent.
Investors snapped up Treasuries at auctions earlier this week even as prices rose on concern about Greece and China. Demand slipped Thursday at a $13 billion sale of 30-year bonds.
“The market is inundated with” newly issued Treasuries “that landed kind of hard,” weighing down prices of long-term debt, said Roth of Mitsubishi UFJ Securities.
The Greek government sought a three-year bailout loan of at least 53.5 billion euros ($60 billion) in a final effort to keep the country in the euro. In exchange, it offered a package of reforms and spending cuts similar to those presented by creditors on June 26.
The Shanghai Composite Index jumped 4.5 percent Friday, extending its advance in the past two days to 11 percent. That snapped a decline that had seen it tumble more than 30 percent from its peak in June.
Even after Thursday’s selloff, U.S. government securities have returned 0.5 percent this week through Thursday, according to the Bloomberg U.S. Treasury Bond Index. The gauge has risen 0.3 percent in July, rebounding from declines in each of the previous three months.