Treasuries Erase Losses After Yellen Suggests March Hike Likely

  • Yields retreat after touching highest levels of week
  • Open interest changes indicate new positioning for rate hikes

Is It Too Early to Call the End of the Bond Bull Market?

Treasuries were little changed in late trading Friday, recovering from session lows, after Federal Reserve Chair Janet Yellen reinforced expectations that the central bank will raise interest rates at policy makers’ next meeting on March 14-15.

Expectations that Yellen would ratify the market’s near-certainty about a March rate increase had driven yields higher over the course of the week after hawkish comments by several Fed officials. The two-year yield traded at the highest level since 2009. Yellen specified “our meeting later this month,” saying that an increase “would likely be appropriate” if employment and inflation keep moving toward the Fed’s expectations.

  • “Aside from confirming March, which was largely priced in, Yellen didn’t sound particularly hawkish around future hikes,” BMO strategist Aaron Kohli said. “This allowed the curve a bit of release with regards to what was priced in already.”
  • Yields reached session highs moments after the text of Yellen’s speech was published, the two-year extending its climb to 3.3bp; it was little changed at 4:10pm ET, still higher on the week by 16bp, the biggest increase since 2015.
  • 5s30s curve, which traded near lowest levels of past two years before the speech, later rebounded and was steeper by less than 1bp in late trading.
  • Flows after the statement were driven by short-covering and unwinds of flatteners ahead of next week’s 10Y and 30Y auctions, according to traders.
  • Yellen’s comments on immigration as key to labor force growth also drove curve steepening, CIBC strategist Richard Gilhooly said. Weak wage growth in February employment report will shift focus to protectionist measures as a remedy, potentially curbing growth while boosting inflation, he said
  • Many banks have changed Fed forecasts over the past two days, moving calls for the next hike forward to March.
  • Open interest surged Thursday in green-pack (2019) eurodollars, preliminary CME data show, suggesting that fall in prices represented new positioning for higher rates as opposed to long positions being exited.
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