Treasuries Fall as Yellen Expects Fed Rate Increase This Year

Fed Chair Signals 2015 is the Year For a Hike
  • Futures pricing shows probability of 2015 rate increase at 43%
  • Yields rise as economy expanded faster than forecast in Q2

Treasuries fell, extending this week’s pattern of alternating between gains and losses, after Federal Reserve Chair Janet Yellen said the central bank is poised to raise interest rates this year.

Yields on shorter maturities, which are among the most sensitive to what the Fed does with its benchmark rate, rose after Yellen said in a speech Thursday that most policy makers, including herself, anticipate increasing rates by year-end. Treasuries remained lower after separate reports on Friday showed the U.S. economy expanded more than previously forecast in the second quarter and consumer sentiment fell less than forecast this month.

“Her comments were a little bit more on the hawkish side,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA. “Over the near term, we think the front end is going to be pegged because we need to get more information about what is going to happen with Fed policy.”

U.S. two-year yields rose one basis point, or 0.01 percentage point, to 0.69 percent as of 5 p.m. in New York. The 0.625 percent note due September 2017 fell 1/32, or 31 cents per $1,000 face amount, to 99 28/32.

The benchmark 10-year note yield rose four basis points to 2.16 percent.

GDP Gains

Two-year Treasuries pared losses after House Speaker John Boehner said he will resign from Congress at the end of October, following clashes with conservative members of his Republican conference that threatened a government shutdown next week.

The reaction in Treasuries indicates the market thinks political wrangling may delay a rate increase from the Fed, said Michael Lorizio, senior trader with Manulife Asset Management in Boston. He said it was too early to tell what the ultimate market implications would be.

Gross domestic product, the value of all goods and services produced, rose at a 3.9 percent annualized rate during the second quarter, boosted by gains in consumer spending and construction. That’s more than the 3.7 percent average estimate of 76 economists surveyed by Bloomberg and the 3.7 percent the Commerce Department reported last month, figures showed Friday in Washington.

"People are adjusting their portfolio to the high levels of volatility and to the new information outlined in a detailed speech by the Fed Chair," said Guy Haselmann, head of capital market strategy with Bank of Nova Scotia. "GDP is just an afterthought right now."

The University of Michigan’s consumer sentiment final index for September decreased to 87.2, its lowest level since October 2014, from 91.9 in August.

Traders aren’t convinced a rate increase is a sure thing. There’s a 43 percent probability the Fed will raise rates by its Dec. 15-16 meeting, down from 60 percent odds at the end of August, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.

Yellen Comments

Citing “heightened uncertainties abroad” and a “slightly softer” inflation path as reasons for keeping interest rates unchanged at a meeting last week, Yellen Thursday placed herself squarely in the camp of those Federal Open Market Committee officials who favor raising rates in 2015.

“Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year,” Yellen said in a speech in Amherst, Massachusetts. “The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy."

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