Treasuries Extend Declines as March Hike Almost Fully Priced In

  • Fed’s Brainard and Powell appear open to moving this month
  • Banks including Morgan Stanley revise Fed policy forecasts

Treasuries fell, extending a four-day slide, as a Federal Reserve rate increase on March 15 was nearly fully priced in following comments late Wednesday by Fed Governor Lael Brainard, who said an increase “will likely be appropriate soon.”

Yields were higher by 2-4 basis points as of 3 p.m. in New York. The two-year, the coupon most sensitive to Fed actions, touched 1.336 percent, the highest since 2009. Yields across the curve surged this week after hawkish comments by New York Fed President William Dudley and San Francisco Fed President John Williams. Morgan Stanley, Credit Suisse and Nomura Securities International Inc. are among banks that changed Fed forecasts to call for a March rate increase.

  • 5Y yield also rose to YTD high, rising as much as 6bp to 2.047%; 10Y and 30Y yields remained below 2017 highs
  • 10Y yield touched 2.503% before retreating to about 2.49%, hasn’t closed above 2.50% since Jan. 26
  • Yields remained higher following bigger-than-expected drop in initial jobless claims to lowest level in almost 44 years
  • Fed Governor Powell on CNBC Thursday said a rate hike is on the table for discussion this month and three increases this year, the median forecast of FOMC participants in December, still seems likely
  • Morgan Stanley now calls for a March hike and two additional rate increases this year, as do Credit Suisse and Nomura
  • Preliminary futures open-interest data show large increases in most eurodollar contracts, suggesting new short positions established in Wednesday’s selloff
  • 1st Fed dated OIS contract prices in close to 80% odds of a March increase, based on Fed effective rate of 0.66%; other measures of market-implied probability fall closer to 90%
  • Yellen and Fischer are slated to speak Friday, and market participants want to hear from them what “their lieutenants have been out in force preparing markets for,” independent strategist Martin Mitchell says in note
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