Treasuries Fall as Fed Officials Talk About 2015 Rate Increases

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Treasuries declined, pushing two-year note yields to a three-week high, as St. Louis Federal Reserve Bank President James Bullard said the Fed should prepare to raise interest rates this year.

U.S. government securities have given up their increases from earlier in 2015 as investors prepare for the central bank to increase borrowing costs for the first time since 2006. Bullard said Monday that the central bank has to start “thinking ahead” about moving away from its emergency simulative monetary policies.

“The Fed is trying to set the market up for a September, October or December hike, at least one this year,” said Neil Bouhan, an interest-rate strategist with BMO Capital Markets in Chicago. “They don’t see the market as pricing that in sufficiently.”

The yield on two-year notes rose four basis points, or 0.04 percentage point, to 0.71 percent as of 12:30 p.m. New York time. The 0.625 percent security due in June 2017 fell 2/32, or 63 cents per $1,000 in face amount, to 99 27/32. The yield reached the highest level since June 26.

The median of analyst forecasts compiled by Bloomberg is for it to climb to 1.10 percent by the end of 2015.

Benchmark Yields

The benchmark 10-year note yield climbed two basis points to 2.37 percent. Trading of Treasuries began in London after being closed in Japan for a holiday.

Treasuries with maturities of one year and longer were little changed this year through July 17, after being up as much as 3 percent at the end of January, based on the Bloomberg U.S. Treasury Bond Index.

Fed Chair Janet Yellen told lawmakers last week she expected policy makers to act this year and that they’ll probably shift rates gradually. The central bank has held its short-term interest-rate target at virtually zero since December 2008 to bolster the economy.

That helped push up traders’ forecasts for short-term interest rates. Traders now expect borrowing costs to be 0.76 percent in a year, according to Bloomberg data, up from their forecasts of 0.71 percent a week ago.

JPMorgan Chase & Co. suggested investors sell two-year Treasury notes as the market is underestimating the pace of the Fed’s rate increases. The bank predicted the Fed will increase borrowing costs twice this year, starting in September.

“Stay short two-year Treasuries,” JPMorgan analysts wrote in a research note published on July 18. “Markets remains underpriced for liftoff versus our forecast. Valuations remain rich.” A short position is a bet that an asset price will fall.

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