March 15, 2017 / 3:39 PM / 9 months ago

TREASURIES-Short-term yields hit multi-year highs ahead of Fed

    * U.S. 2-year yield hits highest since June 2009
    * Fed expected to raise rates at end of meeting
    * Longer-dated yields fall in curve flattener trade

    By Sam Forgione
    NEW YORK, March 15 (Reuters) - The U.S. Treasury yield curve
flattened on Wednesday, with two-year yields touching their
highest since mid-2009 and long-dated yields falling, as
investors braced for a Federal Reserve rate increase and the
potential for a more aggressive pace of future hikes. 
    U.S. two-year yields, which are considered most vulnerable
to Fed policy, rose to 1.401 percent, their highest since June
2009, while three-year yields hit 1.700 percent, their highest 
since April 2010. U.S. 30-year yields fell as much as three
basis points and benchmark 10-year yields declined by as much as
    Interest rates futures implied traders saw a 93 percent
chance the Fed would announce it was raising rates by a quarter
percentage-point at the end of its two-day meeting, CME Group's
FedWatch program showed. That was up from 90.8 percent Tuesday. 
    "Investors are paying their respect that today's a Fed
hiking day, and the two year yield is more sensitive to the
moves, so that's why it's moving up," said George Goncalves,
head of U.S. rates strategy at Nomura in New York.
    The Fed is scheduled to release its latest policy statement
along with updated economic forecasts at 2 p.m. EDT (1800 GMT).
Fed Chair Janet Yellen is due to hold a press conference half an
hour later.
    Attention is turning to whether the U.S. central bank will
signal an even faster pace of monetary tightening this year than
the current three rate hikes that it projected at its December
    Longer-dated yields fell since rate increases reduce
inflation expectations, thereby boosting longer-dated Treasuries
prices and pushing their yields lower since inflation is a risk
to the debt because it erodes their interest payouts.
    Data showing a steady increase in inflation, with the
consumer price index posting its biggest year-on-year increase
in nearly five years in February, reinforced expectations for a
Fed rate increase Wednesday and a potential uptick in the Fed's
projected number of rate hikes this year.
    "The Fed would have had this data, and the market
expectation might be that the probability of them sounding
hawkish might have marginally gone up," said Aaron Kohli, an
interest rate strategist at BMO Capital Markets in New York.
    Benchmark 10-year Treasuries prices were last up
1/32 to yield 2.589 percent, from a yield of 2.595 percent late
    U.S. two-year notes were last down 1/32 in price to yield
1.397 percent, from a yield of 1.380 percent late Tuesday. 
      March 15 Wednesday 11:16AM New York / 1516 GMT
 US T BONDS JUN7               147-7/32     0-12/32   
 10YR TNotes JUN7              122-240/256  0-16/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.7575       0.7695    -0.005
 Six-month bills               0.91         0.9269    -0.005
 Two-year note                 99-122/256   1.397     0.017
 Three-year note               99-202/256   1.6975    0.013
 Five-year note                98-212/256   2.1253    0.002
 Seven-year note               98-52/256    2.407     -0.007
 10-year note                  97-20/256    2.5857    -0.009
 30-year bond                  97-12/256    3.1531    -0.020
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        32.50         0.00    
 U.S. 3-year dollar swap        25.00         0.00    
 U.S. 5-year dollar swap        10.00         0.25    
 U.S. 10-year dollar swap       -3.00         0.25    
 U.S. 30-year dollar swap      -37.50         0.75    
 (Reporting by Sam Forgione; Editing by Chizu Nomiyama)

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