Treasury Market Converges With Yellen on Gradual Rate Increases

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Treasuries rose as bond traders adopt the Federal Reserve’s guidance that the pace of interest-rate increases starting later this year will be gradual.

Longer-term Treasuries led gains even as Fed Chair Janet Yellen said in congressional testimony that the economy has improved a great deal and she expects “growth to strengthen over the remainder of this year.” Traders are pricing in one rate increase by December, according to data compiled by Bloomberg.

“The long end is where people are making their bets,” said Thomas Di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “There’s been a lot of criticism of the Fed as far as keeping rates low for too long.”

The U.S. 10-year note yield fell five basis points, or 0.05 percentage point, to 2.35 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The benchmark 2.125 percent security due in May 2025 added 13/32, or $4.06 per $1,000 face amount, to 98. The yield touched 2.47 percent on July 13, the highest level on a closing basis since June 26.

Thirty-year bond yields declined six basis points to 3.14 percent.

Trader Positioning

“If we wait longer it certainly could mean that when we begin to raise rates we might have to do so more rapidly,” Yellen said in response to a question during testimony before the House Financial Services Committee.

Fed funds futures show a 33 percent chance the central bank will increase its benchmark rate in September from virtually zero, up from 31 percent Tuesday, and a 65 percent chance by December, compared with 66 percent the day before, according to data compiled by Bloomberg.

“The market in the last two months has begun to embrace the view that the pace will matter more than the liftoff,” said George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., one of the 22 primary dealers that trade directly with the Fed. “Earlier in the year, the market wasn’t buying into the concept.”

Treasuries with maturities of one year and longer have lost 0.4 percent this year, according to the Bloomberg U.S. Treasury Bond Index. U.S. debt securities maturing in 10 years and longer are down 5.7 percent.

Recent economic data have been mixed. Retail sales dropped 0.3 percent last month, compared with a revised 1 percent growth rate the month before, according to the Commerce Department. The U.S. added 223,000 jobs in June, while the jobless rate dropped to a seven-year low of 5.3 percent.