Treasuries Tumble as Fed Minutes Signal Chance of June Increase

  • Two-year note yields reach highest level since March
  • Traders expectations for rate rise next month climb to 30%

Treasuries plunged, driving two-year yields to the highest since March, after minutes of the Federal Reserve’s April meeting showed policy makers considered an interest-rate increase in June appropriate if the economy continued to improve.

Yields soared across maturities as the market-implied probability of a rate hike next month jumped to 32 percent, from 4 percent Monday. Referring to the June meeting, officials “generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision” based on how the economy evolves, the minutes said.

Before this week, traders had all but written off a June increase and weren’t fully pricing in the next rate boost until 2017. Improving economic data, led by a stronger-than-forecast inflation report Tuesday, along with the minutes have now brought forward expectations the central bank will raise rates this year, after liftoff from near zero in December.

"You have a consensus view from the group that the June hike is in play,” said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “Unless there’s an outlier in data, the market is taking the minutes as one step closer to a June hike."

Note Slump

The yield on the two-year note, the coupon security most sensitive to expectations for Fed policy, rose six basis points, or 0.06 percentage point, to 0.89 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security maturing in April 2018 fell 1/8, or $1.25 per $1,000 face amount, to 99 23/32.

Yields on the benchmark 10-year note climbed eight basis points, the most since March, to 1.85 percent.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June,” according to minutes of the Federal Open Market Committee’s April 26-27 meeting released Wednesday.

"The meeting minutes definitely were supportive of an interest-rate increase, and were a bit more hawkish," said Chris Gaffney, president of EverBank World Markets in St. Louis. He anticipates one hike this year, in December.

Longer maturities led losses in trading Wednesday, counter to the trend that’s dominated 2016. Investors had piled into longer-dated debt in recent months, pushing the extra yield that 10-year notes offer over two-year securities to the lowest since 2007 on Wednesday, before the release of the minutes.

The minutes may bolster the case made by bond bears, who’ve been arguing for higher yields for months. The consensus view on Wall Street is for the 10-year yield to rise to 2.19 percent by year-end, and to 2.3 percent in the first quarter of 2017.

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