- Two-year note yields surge by the most in nearly eight months
- Futures traders see 46% probability of rate increase this year
Treasuries fell, lifting two-year note yields by the most since March, as Federal Reserve policy makers said the economy is expanding at a “moderate” pace and gave themselves the option to tighten policy at their December meeting.
Two-year yields surged to a one-month high as traders boosted the probability that the Fed will raise rates this year for the first time since 2006. Policy makers left rates unchanged Wednesday. They removed a line from September’s policy statement saying global developments “may restrain economic activity somewhat,” saying only that the central bank is monitoring the international situation.
“December’s not only still on the table, it’s in the crosshairs as a liftoff date,” said Ward McCarthy, chief financial economist at Jefferies Group LLC in New York, one of the 22 primary dealers that trade with the Fed.
U.S. two-year note yields rose eight basis points to 0.70 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.625 percent note due September 2017 fell 5/32, or $1.56 per $1,000 face amount to 99 27/32.
The yield on the benchmark 10-year note rose six basis points to 2.1 percent. The 30-year bond yield rose two basis points to 2.88 percent.
"The market’s clearly starting to take this as more of a hawkish signal, the front end of the curve is starting to rise. ," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA. "Data going forward between now and December is going to be really key."
Futures markets show a 46 percent chance that the Fed will lift its benchmark by year-end, up from 37 percent before the statement’s release. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
“They are trying to push back against the extremely pessimistic pricing in about the time and the pace of Fed hikes,” Priya Misra, head of global interest-rates strategy at TD Securities in New York, a primary dealer, said about the Fed. “That’s why we are getting a big move in rates. We had priced out the chance of a hike this year. If they are saying they don’t see weakness as material to a change in the outlook, they can very well go in December."
Policy makers added a direct reference to the Federal Open Market Committee’s December meeting to their latest statement.
“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation,” the Fed wrote in its statement.
Mixed data, including weaker-than-forecast new-home sales and consumer confidence reports this week, had lowered expectations for a rate increase this year.
“It’s not as dovish as the Street was expecting,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, referring to the statement. “It leaves December wide open for the Fed to move if it wants to.”