Treasuries Fall as Traders Weigh Scope for Higher Interest Rates

  • Bullard latest Fed policy maker to say rate rise not far off
  • Hawkish Fed speak tempered by weak durable goods, jobs data

Treasuries fell as Federal Reserve officials talked up the prospects for raising interest rates in the coming months, even as economic data suggest growth and inflation may remain constrained.

The spread between two- and 30-year Treasuries, known as the yield curve, narrowed for a third day. Bookings for goods and materials meant to last at least three years fell in February for the third time in four months, while initial jobless claims rose.

The data follows statements from Federal Reserve Bank of St. Louis President James Bullard today that the U.S. central bank could be getting close to raising interest rates again. U.S. government securities due in more than a year have returned 1.8 percent in 2016, compared with a 0.9 percent return for 2015, according to Bloomberg World Bond Indexes, as doubts persist about the strength of the world’s largest economy. Central-bank officials have pared their forecasts for the number of U.S. rate increases in 2016 to two from four.

“We’re getting two different tensions in the market,” said Brian Edmonds, the head of interest rates in New York with Cantor Fitzgerald Co., one of 22 primary dealers that trade with the Fed. “One, we’re hearing a lot of Fed speak now that the Fed could tighten in April. But the market is not really paying attention. The market is discounting that the Fed can raise rates at the next meeting, partly on the data.’’

Yield Rises

The yield on the benchmark Treasury 10-year note climbed 0.02 percentage point to 1.90 percent as of the 2 p.m. close in New York. The spread between two- and 30-year Treasuries narrowed to 1.8 percentage points, near the lowest since 2008.

Orders for durable goods declined 2.8 percent last month after a 4.2 percent gain in January that was less the previously reported, Commerce Department data showed Thursday. Initial jobless claims increased by 6,000 to 265,000 in the period ended March 19, a Labor Department report showed.

“The relatively minor downgrades contained in the March SEP suggest that the next rate increase may not be far off provided that the economy evolves as expected,” Bullard said in a speech in New York on Thursday, referring to Fed officials’ quarterly forecasts, known as the Summary of Economic Projections.

“The bond market seems to be quite resilient versus Fed commentary because the past experience has been that the Fed is rather the player to adjust itself to market expectations,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “This has been a pattern for the past two years now, and for that reason the market tends to take any hawkish commentary with a pinch of salt.”

After Thursday’s shortened trading session, financial markets across most of Asia, Europe and North America will be closed on Friday for holidays.

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