Treasury Yields Rise From Near 2017 Lows as March Hike Odds Rise

  • Short maturities lead yields higher on heavy futures volume
  • Trump’s Tuesday address may rekindle stimulus expectations

Credit Suisse's Parker Sees Two Fed Hikes in 2017

Treasuries fell, led by short maturities, as market-implied odds of a Federal Reserve interest-rate hike in March rose the day before President Donald Trump is to address Congress on his fiscal agenda.

Yields were higher by 3-6 basis points as of 2:10 p.m. in New York, led by notes maturing in two to five years. The move accelerated after noon amid heavy volume in futures, especially April fed funds and December eurodollars. Earlier, Trump in a speech to governors at the White House said the U.S. is “going to start spending on infrastructure big.” Last week, fading expectations for fiscal stimulus helped drive gains for Treasuries.

  • 10Y yield rose 5.5 basis points from its lowest closing level this year to almost 2.37%, also reflecting potential for a rebound in corporate issuance this week and rising yields in Germany as French political risk ebbed
  • With no apparent catalyst, March hike odds increased to around 40% from 28% based on 1st Fed OIS; volume in April fed funds futures topped 181k contracts, highest in the fed funds strip
    • Barclays last week recommended setting a short position in April fed funds, expecting market-implied offs of a March hike to top 50%
  • Fed’s Kaplan, speaking in Oklahoma, reiterated his view that accommodation should be removed gradually and patiently without mentioning the March 15 meeting
  • German 10Y yield rose from its lowest closing level since December as ebbing French election risk drove OAT yields lower for fourth straight day
  • IG credit issuance is expected to rebound, adding to pressure on USTs via crowding and/or hedging; Monday’s slate includes mostly sub-$1b deals possibly totaling $10b
  • UST 5s30s curve flattened by about 3bp, aided by potential for month-end flows; Bloomberg Barclays Index call for Treasury duration to increase by 0.11yr at Tuesday’s 3pm close
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