Treasuries Drop on Signs of Inflation as Fed Debates Rate Rise

  • Two-year note yields rise to highest in more than two months
  • Fed statement set for 2 p.m. in Washington; Yellen at 2:30

Treasuries fell, with benchmark 10-year note yields touching the highest level since January, after a report showed core U.S. consumer prices climbed more than forecast in February, bolstering the outlook for inflation as the Federal Reserve concludes a two-day meeting.

The yield on the two-year note, the security most sensitive to Fed policy, reached the highest in more than two months. Futures prices indicate traders see an 83 percent chance the central bank will raise interest rates in 2016, up from a 34 percent probability assigned a month ago, even as they see almost no possibility of an increase Wednesday. The Fed has indicated it will base its decisions on economic progress as it looks for inflation to rise to its 2 percent target.

“U.S. data of late has been much better, although the global environment remains fragile,” said Christopher Sullivan, chief investment officer in New York at United Nations Federal Credit Union. “The policy statement will probably acknowledge lower inflation expectations but improving actual inflation data.”

Traders are boosting bets on the path of Fed policy tightening amid signs of rising consumer prices. A bond-market gauge of inflation expectations known as the 10-year break-even rate rose to the highest on a closing basis since Jan. 5 and indicates price gains will average about 1.57 percent annually over the next decade. While policy makers won’t raise rates four times in 2016 as they indicated in December, officials will still move twice, based on Bloomberg surveys of economists.

Rising Yields

QuickTake The Fed Lifts Off

Benchmark 10-year note yields rose two basis points, or 0.02 percentage point, to 1.99 percent as of 12:21 a.m. New York time, according to Bloomberg Bond Trader data, the highest on an intraday basis since Jan. 28. The 1.625 percent security due in February 2026 fell 5/32, or $1.56 per $1,000 face amount, to 96 23/32.

The two-year note yield rose for a sixth day, climbing three basis points to 0.99 percent, the highest on an intraday basis since Jan. 8.

The Federal Open Market Committee is scheduled to issue its post-meeting statement and updated interest-rate forecasts, known as the dot plot, at 2 p.m. in Washington. Chair Janet Yellen will hold a press conference at 2:30 p.m.

“There’s potential for those dots to shift lower, with a median of three” projected increases this year, Sullivan said.

Inflation Gauge

Consumer prices in the U.S. excluding food and fuel climbed more than forecast in February for a second month, figures from the Labor Department showed Wednesday in Washington. The so-called core measure, which strips out volatile food and fuel, rose 0.3 percent from a month earlier, the same as in January.

"Inflation is moving back to their target," said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 22 primary dealers that trade with the Fed. "Yields are going higher."

Treasuries have fallen this month as an equities rout that drove a flight to haven assets earlier in the year eases.

U.S. government securities due in a year and longer have fallen 1 percent since the middle of February, the biggest loss among 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

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