MW: Short-term Treasury yields rise to 1½-month high
Short-term Treasury prices tumbled Tuesday, pushing yields to their highest level since mid March, as investors sold U.S. government debt on mounting fears that the Federal Reserve might raise interest rates sooner than initially expected.
Yields rose in all maturities but the trend was most pronounced in short-term Treasurys, as they are most sensitive to changes in the fed-funds rate and tend to spike when rate-hike expectations increase.
Stronger-than-expected economic data released on Tuesday morning added to the selling pressures in the Treasury market. The upbeat reports came after Fed Chief Janet Yellen said Friday that an interest-rate rise in the coming months is probably appropriate, leading yields to log their largest daily jump since mid May.
On Tuesday, the two-year Treasury yield TMUBMUSD02Y, +1.30% gained 3.6 basis points to 0.919%, its highest level since March 16, according to Tradeweb. One basis point is equal to one-hundredth of a percentage point.
The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, +1.47% the Treasury market’s benchmark, gained 4.2 basis points to 1.879%, its highest level since May 18. And the yield on the 30-year bond TMUBMUSD30Y, +1.19% known as the long bond, rose 3.6 basis points to 2.676%, also the highest since May 18.
On the U.S. economic front, consumer spending leaped 1% in April to mark the biggest gain in almost seven years, the Commerce Department reported, as Americans splurged on new cars and trucks.
And U.S. home prices rose 0.9% in March, exceeding economists’ expectations, according to S&P/Case-Shiller.
But a measure of Chicago-area economic activity fell in May back into contraction territory. And U.S. inflation as measured by the PCE index, the Fed’s favorite inflation gauge, rose 1.1% in the 12 months ended in April. That’s up from 0.8% in the prior month but well below the Fed’s 2% target.
The data were viewed as supportive of the rate-hike scenario, said James Kochan, chief fixed-income strategist at Wells Fargo Funds Management. “The pressure is building for the Fed to move,” Kochan said, even as the headline inflation lagged, because “Fed officials were already projecting inflation to rise gradually” and Tuesday’s data confirm that view.
“If the evidence of a clear acceleration in second-quarter [gross-domestic-product] growth isn’t enough to convince the remaining doubters on the [Fed] that a rate hike is needed soon, the evidence of rising inflation should seal the deal,” said Paul Ashworth, chief U.S. economist at Capital Economics, in emailed comments.
Meanwhile, St. Louis Fed President James Bullard said Monday he is reserving judgment on rate increases and will digest more data before making a decision next month.
