Treasury 2-Year Notes Plunge as Yellen Spurs Rate-Rise Concern

Treasury two-year notes tumbled, sending yields up the most in nine months, after Federal Reserve Chair Janet Yellen’s timetable for higher interest rates sent financial markets reeling.

Yields on all government securities surged on March 19 after the Fed cut bond-buying for a third time and scrapped its jobless-rate threshold for considering rate increases. Treasuries also fell this week as Russia completed the process of annexing Crimea and Ukraine withdrew its military forces from the Black Sea region. U.S. debt may continue the selloff as the Treasury auctions $96 billion of two-, five- and seven-year fixed-rate securities next week.

The Fed’s “move to a more qualitative outlook for future monetary policy and their generally more positive outlook on the economy moved up market expectations for when the Fed is likely to raise rates,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There is a lot of time and a lot of ‘ifs’ to consider, which, despite the selloff, has kept rates lows. But higher rates are still in the forecast.”

The two-year note yield rose eight basis points, or 0.08 percentage point, to 0.42 percent this week in New York, according to Bloomberg Bond Trader prices, the largest weekly climb since the five days through June 21. It touched 0.44 percent, the highest level since Sept. 13.

Benchmark 10-year yields increased nine basis points to

2.74 percent, after dropping 13 basis points last week. The 2.75 percent note due in February 2024 fell 3/4, or $7.50 per $1,000 face amount, to 100 1/32 this week.

Gap Narrows

The 30-year bond yield rose one basis point this week, with the gap between it and the yield on the 10-year note narrowing to as little as 85.4 basis points, the least since May 2010.

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending March 18, according to U.S. Commodity Futures Trading Commission data. The figure is the least since the week ending Feb. 28.

Speculative short positions, or bets prices will fall, outnumbered long positions by 55,014 contracts on the Chicago Board of Trade. Net-short positions fell by 63,196 contracts, or 53 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Net longs in two-year note futures dropped by 75 percent to 3,137 from 12,476 contracts in the week ending March 18.

Treasury Auctions

The Treasury will sell $32 billion in two-year fixed-rate notes, $35 billion in five-year debt and $29 billion in seven-year securities in the three days starting March 25. It will also auction $13 billion in two-year floating-rate notes on March 26.

“Even though some of the recent data may not be consistent with rates rising early next year or even later this year, the market is starting to price in that possibility following the Fed’s decision and comments,” said Alessandro Giansanti, a senior rates strategist at ING Bank NV in Amsterdam. “Yields will continue to rise.”

Yellen said following the central-bank policy meeting that borrowing costs could start rising “around six months” after the central bank ends the bond-buying it has used to support the economy and cap borrowing costs. The Fed trimmed another $10 billion off the monthly purchases, to $55 billion, from $85 billion last year.

Target Rate

Fed Bank of St. Louis President James Bullard said yesterday Yellen’s forecast on interest-rate increases was in line with private-sector surveys.

“That wasn’t very different from what we had heard from financial markets,” he said.

The central bank said it will look at a wide range of data in determining when to lift its benchmark interest rate from near zero, including the labor market, inflation expectations and financial markets, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate. It predicted the target rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast.

Fed Bank of Minneapolis President Narayana Kocherlakota, who dissented from this week’s decision, said yesterday the central bank’s new guidance may foster uncertainty and serve as “a drag on economic activity.”

‘Crimea Crisis’

Treasuries erased the majority of last week’s gains, which were the most in two months, as concern eased that the Crimean conflict could spread.

U.S. President Barack Obama authorized potential future penalties on sectors of the Russian economy after imposing financial sanctions on a wide swath of Russian officials, including billionaires close to President Vladimir Putin. Russia in turn banned entry to nine U.S. officials, including House Speaker John Boehner and Senator John McCain.

“It’s not clear that there’s an imminent near-term escalation of the issues,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford Connecticut. Still, “the Crimea crisis continues to be a significant factor for the Treasury market,” he said.

Treasuries held by foreign central banks rose by $32.2 billion to $2.89 trillion as of March 19, according to Fed data The holdings had dropped $104.5 billion as of March 12.

The figures damped speculation that last week’s record drop reflected Russia shifting its holdings out of America amid the threat of sanctions.


The gap between 10-year Treasuries and similar-maturity TIPS, known as the break-even rate, dropped for a second week as the sale of $13 billion of Treasury Inflation Protected Securities on March 20 attracted below average demand. The gap was 2.15 percentage points, compared with 2.23 percentage points on March 7.

Inflation measured on a 12-month basis has been below the Fed’s 2 percent goal for almost two years, and prices rose 1.2 percent for the year ending January.

U.S. index-linked bonds underperformed their nominal peers this month, declining 1.1 percent through yesterday, according to Bank of America Merrill Lynch Bond Indexes. Treasuries dropped 0.6 percent.

“It’s a negative environment for inflation right now,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 22 primary dealers that trade directly with the Fed. “Any risk premium that had been built in is just going away. If the Fed is on a path to taper when inflation is low, it makes no sense to build in a risk premium.”

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