Treasuries Fall After CPI, Pushing 2-Year Yield to New 2017 High

  • Note’s yield touches 1.263%, highest level since Dec. 28
  • 10-year yield near its highest closing level of 2017

VTB's MacKinnon Says Fed's March Meeting Is Live

Treasuries fell, driving two-year yields to the highest level this year, as stronger-than-expected data on consumer prices and retail sales led traders to add to bets on Federal Reserve interest-rate increases.

Five-year yields also touched 2017 highs as markets priced in higher odds of Fed hikes this year, beginning as soon as the next Federal Open Market Committee decision on March 15. The market-implied probability of a March increase rose to 44 percent, from 34 percent Tuesday . The two-year yield reached 1.263 percent, its highest since Dec. 28.

  • “Treasuries sold off following this round of data, but have been surprisingly contained in the range,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. “In the context of how data-dependent the Fed is, we’re impressed with how well the market is trading given the implications for near-term monetary policy”
  • Yields were higher by 2bp-4bp as of about 3 p.m. in New York, with the 10Y at 2.502%, within 1bp of its YTD high close at 2.512% on Jan. 25
  • Market-implied odds of a hike by June about 100% after CPI rose 0.6% vs 0.3% median est. in Bloomberg survey, while retail sales rose 0.4% vs 0.1% est.; core CPI and retail sales ex-auto and gas also increased more than forecast
  • JPMorgan changed its forecast for next Fed hike to May from June
  • 5Y yield rose as high as 2.0197%, flattening 5s30s yield curve for 7th straight day; spread fell below 108bp, approaching low end of range since mid-December collapse sparked by FOMC meeting that produced higher estimates for how much the fed funds rate might rise in the next few years
  • Yellen testimony to House Financial Services Committee was identical to Tuesday’s comments, when she said waiting too long to raise 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
  • Also Wednesday, Boston Fed’s Rosengren said rates should rise “at least as quickly” as the Fed’s median forecast, and “possibly even a bit more rapidly”
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