Treasury Two-Year Notes Fall as Fed Boost Still Seen in December

  • Manufacturing report briefly boosted longer-maturity debt
  • Initial demand for haven assets often proves temporary

Two-year Treasury notes declined for the first time in more than a week, with yields close to a five-year high, amid speculation the terror attacks in Paris won’t prevent the Federal Reserve from raising interest rates as soon as next month.

While French and German government bonds climbed after Europe’s worst terror incident in more than a decade, U.S. traders are looking to inflation figures set for release Tuesday for signs that the Fed will lift borrowing costs from near zero next month. Yields have risen across maturities since the end of October as traders priced in the central bank’s first rate increase since 2006.

"Inflation is really the key fulcrum point for whether or not the Fed goes in December," said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of 22 primary dealers that trade with the central bank. "It’s pretty likely at this point that liftoff is on Dec. 16," when the Fed is scheduled to announce its next policy decision.

Benchmark two-year note yields rose two basis points, or 0.02 percentage point, to 0.85 percent at 5 p.m. in New York, based on Bloomberg Bond Trader data. The price of the 0.75 percent security due in October 2017 fell 1/32, or $0.31 per $1,000 face amount, to 99 25/32. The yield reached 0.95 percent Nov. 6, the highest since May 2010, on a report of surging U.S. job growth.

One-month bill rates rose after the Treasury Department said it will sell a record $55 billion of the obligations Tuesday, up from last week’s $52 billion. The securities yielded 0.03 percent, up about one basis point from last week. The government is increasing bill offerings after cutting issuance to keep under the debt ceiling. 

December Watch

Some longer-maturity U.S. debt drew temporary support from a weaker-than-projected regional manufacturing report, with 10-year notes briefly extending last week’s rebound from the highest yields in more than three months.

Futures show a 64 percent chance the Federal Open Market Committee will announce a rate increase on Dec. 16, up from a 50 percent probability at the end of October. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Flight-to-safety rallies have typically proven short-lived. Gains in government bonds after major terror attacks in recent years were largely erased within days or weeks as more information became available and markets processed the news.

"We’ve been in this world for sometime now; I don’t think this changes anything for the Fed," said Charles Comiskey, head of Treasuries trading in New York at Bank of Nova Scotia, another primary dealer. "In the U.S., we just go back to data watching."

The U.S. consumer price index barely rose in October from a year earlier, according to projections from economists surveyed by Bloomberg before the figures are released. Stripping out food and energy costs, the index probably climbed 1.9 percent in October from a year earlier, the same pace as in September.

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