Treasury Short-Term Yields Reaches Four-Month High on Fed Wagers

  • Investors await more signals on rate path from central bankers
  • Gauge of inflation expectations touches highest since May

Treasury two-year note yields climbed to the highest in more than four months as investors await a raft of Federal Reserve speakers and a key U.S. jobs report.

U.S. yields rose for a fifth day across maturities as a gauge of inflation expectations climbed to the highest since May amid concern that advances in wages and crude oil will push consumer prices higher. Friday’s employment figures are forecast to add to the positive economic picture in the U.S., which has prompted policy makers to signal an increase may be in the cards. More officials are due to speak Friday.

The Bloomberg Barclays U.S. Treasury Total Return index slid to its weakest level in more than three weeks as futures traders boosted bets on a rate hike by December, just as speculation emerges that the European Central Bank and Bank of Japan are looking at ways of tapering their quantitative-easing programs. Signs of global economic weakness have led central banks abroad to maintain accommodative policies and hampered the Fed’s efforts to tighten, leading to concerns among officials that the U.S. labor market may overheat.

“The U.S. has imported a lot of monetary stimulus thanks to the QE policies of the BOJ and the ECB, so the curve has been particularly flat and I think the Fed will have to compensate in the coming quarters as inflation picks up,” Francesco Garzarelli, London-based co-head of global macro and markets research at Goldman Sachs Group Inc., said in an interview on Bloomberg Television.

‘Glide’ Higher

Yields on Treasury two-year notes, the coupon maturity most sensitive to Fed policy expectations, climbed two basis points, or 0.02 percentage point, to 0.85 percent as of 5 p.m. New York. This week it touched the highest intraday level since June 3. The price of the 0.75 percent security due in September 2018 was at 99 26/32.

The extra yield investors get for holding the securities instead of similar-maturity German or U.K. debt rose to the highest in at least a decade, reflecting the Fed’s status as the only major central bank contemplating a hike in interest rates this year.

U.S. 10-year yields rose four basis points to 1.74 percent, the highest closing level since June. In the next four or five years, they’ll “glide toward 3 percent -- that’s the path of least resistance,” Garzarelli said.

Adding to evidence of U.S. economic strength, filings for unemployment benefits fell last week to the second-lowest level since 1973, a Labor Department report showed Thursday. Data Wednesday showed U.S. services companies expanded in September at the fastest pace in almost a year.

“We got another very solid employment number from the jobless claims,” said Thomas Roth, senior Treasury trader in New York at MUFG Securities Americas Inc. “We are starting to see that so far September is back on the track that will lead the Fed to remove a little more accommodation.”

The market-implied probability of higher U.S. rates by year-end has risen to 64 percent, while the chance of a hike in November has climbed to 24 percent from 17 percent at the start of this week. The calculation is based on the assumption the effective fed funds rate will trade at the middle of the new range after the central bank’s next boost.

A Treasury-market gauge of inflation expectations over the next decade known as the break-even rate rose to 1.65 percentage points, the highest since May, according to data compiled by Bloomberg. The Fed targets a 2 percent inflation rate.

Central-bank officials set to speak Friday include Cleveland Fed President Loretta Mester, who said this week that the case for a rate increase would still be “compelling” when the Fed Open Market Committee meets Nov. 1-2. Fed Vice Chairman Stanley Fischer, Governor Lael Brainard and Kansas City Fed President Esther George are scheduled to appear at the Institute of International Finance’s annual meeting in Washington.

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