Treasuries Decline as Fed's Dudley Cites Growth in U.S., Europe

  • New York Fed president calls economic news `mostly favorable'
  • Bonds reverse earlier gains after yields followed oil lower

Treasuries fell, reversing earlier gains, after Federal Reserve Bank of New York President William Dudley called U.S. economic news “mostly favorable” and cited improvement in Europe’s growth outlook.

The yield on the 30-year bond, the security most sensitive to inflation expectations, rose as Dudley said he’s confident that inflation will return to the Fed’s 2 percent target “as the labor market tightens further and the transitory factors that have held inflation down dissipate” in remarks posted on the Fed’s website. Yields rose as stocks climbed, with Morgan Stanley joining a slew of banks that exceeded profit estimates.

"The fact that the Fed is trying to sound more hawkish is negative for rates," said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, one of 22 primary dealers that trade with the Fed. "The market had feared you’d see real disappointment in earnings. Treasuries have been waiting for risk markets to do worse and that hasn’t happened yet."

The Fed is looking to raise rates even as central banks abroad maintain or boost stimulus amid signs of slow global economic growth and lackluster inflation. Concern that global factors will impact the U.S. economy has weighed on Treasury yields this year. Futures suggest about a 12 percent probability that the Fed will tighten policy at or before its June meeting, down from about 75 percent odds assigned by traders on Jan. 1.

Benchmark 10-year Treasury note yields increased three basis points, or 0.03 percentage point, to 1.78 percent as of 1:04 p.m. in New York. The price of the 1.625 percent security due in February 2026 fell 1/4, or $2.50 per $1,000 face amount, to 98 19/32. The yield earlier had fallen as much as three basis points.

Oil Moves

U.S. 30-year yields climbed four basis points to 2.60 percent.

Treasuries rose earlier as crude-oil prices plunged after the world’s biggest producers failed to limit supplies. Crude erased losses as U.S. stocks advanced.

After the International Monetary Fund last week cut its estimates for U.S. growth, Dudley also noted that “monetary-policy adjustments are likely to be gradual and cautious, as we continue to face significant uncertainties and the headwinds to growth from the financial crisis have not fully abated.”

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