Treasuries Decline as Traders Wait for Yellen and Look Past June

  • Fed chair speaks at an event in Philadelphia on Monday
  • Bond traders pricing 31% chance of July interest-rate increase

Treasury 10-year notes fell for the first time in five days as traders prepared to parse Federal Reserve Chair Janet Yellen’s latest speech for clues about the path of interest-rate normalization.

Yields on the benchmark securities climbed from the lowest level in three weeks before Yellen speaks in Philadelphia Monday afternoon. Treasury two-year notes surged on June 3 by the most since September after data showed the U.S. added the fewest jobs in May in almost six years, pushing traders to slash bets on a rate increase in June or July.

Policy makers have stressed data dependence in determining whether the U.S. economy is strong enough to withstand higher borrowing costs. Yellen said May 27 that the central bank will raise rates "probably in the coming months" after other officials signaled a June increase was possible. Since the release of the May employment report, Fed speakers have cautioned patience in raising rates while determining whether the weak data were an anomaly.

“The market is just setting up for the chair’s remarks following the extremely strong post-payroll rally on Friday,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities LLC in New York, one of 23 primary dealers that trade with the Fed. “While it’s difficult to see Yellen sounding overly hawkish after the trend in payrolls has deteriorated, many investors are likely taking some profits on longs just in case Yellen strikes a slightly more hawkish tone.”

Fed Outlook

Benchmark U.S. 10-year note yields rose three basis points, or 0.03 percentage point, to 1.73 percent as of 10:36 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 99 1/32. The yield fell 10 basis points on June 3, the biggest decline since Feb. 2.

Traders see a 4 percent chance the Fed will raise rates by its June 14-15 meeting and a 31 percent chance of a move by July, down from respective odds of 30 percent and 54 percent as of May 27, futures contracts indicate. Only the likelihood of an increase by the Fed’s final gathering of 2016, in December, is seen as greater than 50 percent.

“A June hike is gone, for sure” and “July is really in doubt,” Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA, a primary dealer, said in an interview on Bloomberg Television. “The risk that I see now is that into the election, the economy could continue to disappoint, making it very hard for the Fed to hike.”

Officials Speak

Yellen is scheduled to speak on the economy and policy at the World Affairs Council in Philadelphia at 12:30 p.m. local time. She is the last scheduled Fed official to speak publicly before the quiet period policy makers typically observe the week before a Federal Open Market Committee meeting.

“I don’t personally see a lot of cost to being patient to the July meeting at least,” Atlanta Fed President Dennis Lockhart said in an interview on Bloomberg Television. Lockhart, who doesn’t vote on policy this year, said he’s not changing his view of the economic outlook based on the May jobs data, and is “more inclined to think in terms of two moves” from policy makers this year.

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