Treasuries Plunge After Fed Speakers Jolt March Hike Odds Higher

Updated on
  • Benchmark two-year yields reach highest since December
  • Hike in mid-March to get ‘serious consideration’: Williams

El-Erian Says Wage Growth Is Key to Fed's March Decision

Treasuries plunged after comments from Federal Reserve officials led traders to ramp up bets that the central bank will raise interest rates in the middle of next month.

Yields on two-year notes surged as San Francisco Fed President John Williams said he expects a rate boost to receive “serious consideration” when policy makers gather March 14-15 in Washington. He added he doesn’t see a need to delay the next move. New York Fed President William Dudley said the case for tightening “has become a lot more compelling,” with most data consistent with above-trend economic growth.

The market-implied probability of a March hike soared above 70 percent, from 50 percent Monday, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the hike. Using the current effective rate of 0.66 percent and the forward OIS rate for the March meeting, the odds are roughly 60 percent, still almost double what they were two days ago.

“These two guys seem to be forceful with what they’re saying,” said Timothy High, U.S. strategist in New York at BNP Paribas SA, one of the Fed’s 23 primary dealers. Given that monthly jobs data won’t be released until March 10, less than a week before the Fed decision, “they might be trying to get a message out to the market a little early.”

The yield on the benchmark two-year Treasury, the coupon maturity that’s the most sensitive to Fed expectations, rose almost 7 basis points to 1.26 percent, touching the highest since December. The 10-year yield increased to 2.39 percent.

As shorter maturities led declines, the difference between yields on five- and 30-year debt collapsed to the flattest since August on a closing basis.

Notable Jawboning

The jawboning from central bankers was notable because it came hours before President Donald Trump’s first address to Congress on Tuesday night, a much-anticipated event for traders looking for details on his fiscal policies. Their remarks suggest that officials aren’t necessarily confined to waiting for more clarity on the administration’s initiatives before acting on monetary policy.

“For Dudley, this is as hawkish and specific as you’re going to get,” Thomas Simons, senior money-market economist at primary dealer Jefferies LLC, wrote in an email. “All of this looks like a coordinated effort by Fed policy makers to raise expectations for a rate hike at the March meeting.”

The market will still look to Trump’s speech, inflation data Wednesday, more Fed comments and the payrolls report next week for further confirmation that the central bank is serious about raising rates in March, Simons said. Fed Chair Janet Yellen is scheduled to speak Friday.

Yields on 10-year New Zealand and Australia bonds also climbed after the Fed officials spoke.

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