Treasuries Fall as Yellen Strikes Hawkish Tone in Testimony

Updated on
  • Fed chair says waiting too long on rates ‘would be unwise’
  • Yield curve flattens for sixth day on higher March hike odds

Did Chair Yellen Increase Chance of a March Rate Hike?

Treasuries slumped after Federal Reserve Chair Janet Yellen said waiting too long to raise interest rates “would be unwise” and that increases “would likely be appropriate” at upcoming meetings should employment and inflation continue to move toward the central bank’s goals.

Yields across the curve were higher by 3-5 basis points, with the 10-year settling around 2.47 percent at 3 p.m. in New York, its highest level since Feb. 3, after briefly rising above 2.50 percent. Treasuries have dropped for four straight sessions in part on resurgent expectations that President Trump’s administration will introduce pro-growth, inflationary policies. Traders are pricing in 34 percent odds that the Fed raises rates at its March meeting, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase, compared to 30 percent before Yellen’s testimony began.

  • 10-year yield rose as much as 6.5bp to 2.5004% before stabilizing as demand materialized at yield level last seen Feb. 1
  • 5s30s curve flattens for a sixth day; gap narrows 1.6bp to 110bp
  • Fed funds futures market fully pricing in an increase by June and a subsequent one by December
  • Richmond Fed’s Lacker in speech earlier Monday said Fed’s next rate increase “should come sooner rather than later” because of “the potential for substantial fiscal stimulus”
  • Later Monday, Dallas Fed’s Kaplan said accommodation should be removed “sooner rather than later”; Atlanta Fed’s Lockhart, stepping down this month, said he doesn’t see compelling reason to hike in March
  • Eurodollar volume surged after publication of Yellen’s comments, included several large block sales and covering of short volatility positions set Monday
  • In early U.S. trading, a flurry of bearish positions were set in eurodollar options; fast-money positioning in front-end eurodollars is at near-record short levels
  • Reaction was muted to January PPI, which rose 0.6% vs 0.3% median estimate in Bloomberg survey, led by gasoline; producer costs excluding volatile components rose 0.2%, in line with median estimate

— With assistance by Edward Bolingbroke, and Brian Chappatta

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