Treasuries Fall as Fed’s Dudley Warns of Complacency

Fed's Dudley Roils Treasuries With Rate-Hike Complacency
  • New York Fed chief says September interest-rate boost possible
  • Futures traders assign 51% odds to a policy change this year

Treasuries declined, reversing earlier gains, after Federal Reserve Bank of New York President William Dudley said an interest-rate increase next month is possible and warned that bond-market valuations looked “stretched.”

Yields on two- and 10-year notes rose for a second day after Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee, said on Fox Business Network that policy makers are “edging closer towards the point in time where it will be appropriate, I think, to raise interest rates further.”

Traders assign coin-flip odds to a rate increase by the end of 2016, according to futures data compiled by Bloomberg. After liftoff from near zero in December, officials have twice cut their projections for the path of hikes this year as improving U.S. economic data contrast with signs of slowing growth abroad. Investors will look to the release on Wednesday of minutes from the FOMC’s July meeting for further insight into officials’ latest thinking.

“Dudley definitely had an impact on the market,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP, one of the 23 primary dealers that trade with the Fed.  “The market’s still not pricing it in,” Lederer said of a 2016 Fed hike, “but the truth is a lot of people are expecting it.”

Yields Rise

Yields on two-year notes, the coupon securities most sensitive to Fed policy expectations, rose two basis points, or 0.02 percentage point, to 0.75 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due July 2018 was 100.

The yield on the 10-year note rose two basis points to 1.57 percent.

Treasuries advanced earlier as Labor Department data showed the consumer-price index was unchanged in July from a month earlier, in line with economist estimates.

A JPMorgan Chase & Co. survey showed Treasury investors held the most net long positions since June 20 in the week ended August 15.

(Corrects characterization of projected Fed rate path in third paragraph of story published Aug. 16.)
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