U.S. 2-Year Yields Climb to Highest Since January on Fed Outlook

  • Notes fall for a fifth day amid improving economic data
  • Traders see a 73 percent chance of Fed rate increase this year

Treasuries declined, pushing two-year yields to the highest since January, as traders wagered that improving U.S. economic data will embolden the Federal Reserve to raise interest rates this year.

The two-year security, which is the most sensitive to Fed policy expectations, fell for a fifth day as traders have added to bets that policy makers will boost rates in 2016 after liftoff from near zero in December. A Labor Department report last week showed jobs growth was stronger than expected last month, even as wages unexpectedly fell.

"Investors have come to the realization that the economic data at some point will allow the Fed to continue with the normalization," said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that trade with the Fed. "The tone from the economic data last week was pretty strong."

The extra yield benchmark 10-year Treasuries offer over comparable-maturity German debt widened to the most since January as data indicate an improving U.S. economy in contrast with tepid growth abroad. The Fed will leave rates unchanged when it meets March 15-16, according to 50 of the 60 economists surveyed by Bloomberg. Economists predict the European Central Bank will cut its deposit rate, which is already below zero, when it meets March 10.

Treasury Auctions

Treasury two-year yields climbed four basis points, or 0.04 percentage point, to 0.91 percent as of 1:26 p.m. New York time Monday, according to Bloomberg Bond Trader data. That’s the highest since Jan. 14. The 0.75 percent note due in February 2018 was at 99 22/32.

Benchmark Treasury 10-year yields climbed four basis points to 1.91 percent, and touched the highest on an intraday basis since Feb. 2.

The U.S. will auction $24 billion in three-year notes March 8, $20 billion in benchmark 10-year securities the next day and $12 billion in 30-year bonds March 10.

“While I’m sure we’ll get decent bidding coming in, it’s going to weigh on the market because you don’t have the risk-off purchase," said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. "There’s a risk-on trade continuing from a strong jobs number.”

Fed Speakers

Derivatives traders see about a 73 percent chance the Fed will raise rates by December, up from a 36 percent probability assigned on Feb. 25, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next hike.

In a speech Monday, Fed Vice Chairman Stanley Fischer said the connection between low unemployment and inflation isn’t broken and may be reasserting itself.

“The link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate -- something that we would like to happen,” he told the National Association for Business Economics in prepared remarks.

A bond-market gauge of inflation expectations known as the 10-year break-even rate fell for a second straight day after rising last week to the highest in two months, according to data compiled by Bloomberg. The measure last month declined to the lowest since 2009.

In a separate speech, Fed Governor Lael Brainard said the U.S. economy isn’t immune to global risks and called for careful adjustments to the policy rate to preserve the expansion.

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