U.S. Two-Year Yields Near 2010 High as Fed Liftoff Approaches

  • Probability for December rate increase reaches 78 percent
  • U.S.-German yield spread close to highest in almost a decade

Yields on two-year U.S. Treasuries traded close to the highest since 2010 before a speech by St. Louis Federal Reserve Bank President James Bullard and as investors prepared for policy makers to raise interest rates next week.

The extra yield the securities pay over similar-maturity German notes was at 1.25 percent after reaching 1.38 percent last week, the highest in almost a decade, amid speculation the policy divergence between the two jurisdictions will persist. While the Fed is preparing to raise borrowing costs, the European Central Bank cut one of its key rates last week in an attempt to kick-start the flagging euro-zone economy.

"We know the Fed is going and it’s just a matter of where they go after that," said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. "The general expectation is that they are going nowhere far or fast."

Two-year Treasury yields were little changed at 0.93 percent as of 9:57 a.m. New York time, according to Bloomberg Bond Trader data. The yield rose to 0.99 percent on Dec. 3, the highest since May 4, 2010. The 0.875 note due in November 2017 was little changed at 99 28/32.

Fed Funds

There’s a 78 percent chance the Fed will raise its benchmark by its Dec. 15-16 meeting, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate averages 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent.

In testimony before Congress’s Joint Economic Committee last week, Fed Chair Janet Yellen warned legislators about the dangers of the Fed waiting too long to raise interest rates. Traders are speculating a report Friday showing U.S. employers added 211,000 jobs in November, bolstered the central bank’s case to increase rates next week.

“The Fed will be at pains to minimize the surprise to the markets, and there is scope for shorter-dated yields to continue to rise,” said Mark Dowding, partner and money manager at BlueBay Asset Management LLP in London. “It seems markets are concluding that the fed funds rate will climb toward 2 percent in the next couple of years,” from a range of zero to 0.25 percent now.

Longer-term Treasury yields dropped as oil tumbled to the lowest in almost seven years amid increased speculation of oversupply at a time when disinflation remains a global concern. Ten-year yields fell two basis points, or 0.02 percentage point, to 2.25 percent, while 30-year yields dropped by three basis points to 2.98 percent.

Before it's here, it's on the Bloomberg Terminal.