Treasuries Fall as Yellen Suggests Rate Hike in Coming Months

Yellen: Appropriate for Fed to Increase Rates
  • Fed chair says economy has made ‘a great deal of progress’
  • Traders pricing 36 percent probability of a June rate increase

Treasuries fell, with two-year notes recording their longest weekly slide since March, as Federal Reserve Chair Janet Yellen said an interest-rate increase in the coming months may be appropriate.

Yields rose across maturities as Yellen said that the U.S. economy has made “a great deal of progress” and continues to advance, with inflation metrics expected to rise and the labor market improving. Yellen appeared at Harvard University for an event billed as a conversation with Greg Mankiw, an economics professor at the school.

Policy makers have been talking up the possibility of a rate increase next month, saying their June 14-15 meeting is "live.” Yellen’s comments echoed those from Fed officials including the presidents of the central bank’s regional arms in San Francisco, Boston and Philadelphia, who have spoken this month in support of higher rates and suggested traders shouldn’t rule out a move as soon as June.

“It looks like the Fed is really getting ready to go, but Yellen is retaining optionality to go over the next few months,” said Gennadiy Goldberg, a New York-based interest-rate strategist at TD Securities (USA) LLC, one of 23 primary dealers that trade with the central bank. “This should push rate-hike pricing higher for all the upcoming meetings.”

Yields Rise

Yields on two-year notes, the securities most sensitive to Fed policy expectations, rose four basis points, or 0.04 percentage point, to 0.91 percent as of 2 p.m. New York time, according to Bloomberg Bond Trader data. The yield climbed for a third week, the longest streak in more than two months. The price of the 0.875 percent security due in May 2018 was 99 30/32.

The benchmark 10-year note yield rose two basis points to 1.85 percent.

Trading in Treasuries closed at 2 p.m. Friday in New York and will stay shut May 30 in observance of Memorial Day, according to the Securities Industry and Financial Markets Association.

Yellen’s remarks came as somewhat of a surprise after some investors expected her to avoid hinting at rate increases, especially heading into a holiday weekend.

Jeffrey Gundlach, the chief executive of DoubleLine Capital LP in Los Angeles, said on Thursday he expected Yellen would “be dovish” in her remarks. He said the Fed will refrain from raising interest rates in June unless traders in the futures market assign odds of at least 50 percent to the move.

Futures prices indicate a 36 percent probability of a June increase, up from a 28 percent chance assigned as of Thursday, and an 80 percent probability of a move this year, up from 72 percent a day earlier, according to data compiled by Bloomberg.

The U.S. economy expanded at a slightly faster pace in the first quarter than initially estimated, Commerce Department data showed Friday.

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