Fed's 2015 Rate-Rise Plans Propel Treasury Note Yields Higher

St. Louis Fed President James Bullard discusses September move
Updated on

The U.S. government-bond market is embracing the reality of Federal Reserve officials' plans to raise interest rates this year.

That's been especially apparent for shorter-term securities, which have underperformed longer-term notes for a third-straight day, as they are seen as more closely tied to Fed policy moves. St. Louis Federal Reserve Bank President James Bullard said Monday that the central bank has to start ``thinking ahead'' about moving away from its emergency simulative monetary policies.


``Comments by some Fed governors set up the possibility that they're closer to raising rates than the market thought,'' said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. Investors ``are willing to take a shot on something coming up in the next statement.''

Treasuries have given up their increases from earlier in 2015 as investors prepare for the central bank to raise borrowing costs for the first time since 2006. U.S. debt  with maturities of one year and longer were little changed this year through July 17, after being up as much as 3 percent at the end of January, based on the Bloomberg U.S. Treasury Bond Index.

Yellen View

Fed Chair Janet Yellen told lawmakers last week she expected policy makers to act this year and that they'll probably shift rates gradually. The central bank has held its short-term interest-rate target at virtually zero since December 2008 to bolster the economy.

``The Fed is trying to set the market up for a September, October or December hike, at least one this year,'' said Neil Bouhan, an interest-rate strategist with BMO Capital Markets in Chicago. ``They don't see the market as pricing that in sufficiently.''

That helped push up traders' forecasts for short-term interest rates. Traders expect borrowing costs to be 0.74 percent in a year, according to Bloomberg data, up from their forecasts of 0.71 percent a week ago.

JPMorgan Chase & Co. suggested investors sell two-year Treasury notes as the market is underestimating the pace of the Fed's rate increases. The bank predicted the Fed will increase borrowing costs twice this year, starting in September.

``Stay short two-year Treasuries,'' JPMorgan analysts wrote in a research note published on July 18. ``Markets remains underpriced for liftoff versus our forecast. Valuations remain rich.'' A short position is a bet that an asset price will fall.

 The yield on two-year notes rose four basis points, or 0.04 percentage point, to 0.71 percent as of 5 p.m. New York time. The yield reached the highest level since June 26.

The median of analyst forecasts compiled by Bloomberg is for it to climb to 1.10 percent by the end of 2015.