Bond traders say don't count out June hike af­ter Yellen re­marks

The Pak Banker - - MARKETS/SPORTS -

Trea­suries traders who de­layed hol­i­day get­away plans on Fri­day took away a clear mes­sage from Fed­eral Re­serve Chair Janet Yellen -- a midyear in­ter­est- rate hike may be on the way. Yellen's re­mark that the Fed will raise rates "prob­a­bly in the com­ing months" drove bench­mark two- year note yields higher for a third con­sec­u­tive week.

The com­ments at an af­ter­noon ap­pear­ance at Har­vard Uni­ver­sity fol- lowed those from other Fed of­fi­cials who sig­naled that the Fed­eral Open Mar­ket Com­mit­tee's June 14- 15 meet­ing is "live."

The mar­ket- im­plied prob­a­bil­ity of a rate in­crease next month has risen to 30 per­cent, from 12 per­cent at the end of April. For the fol­low­ing meet­ing, in July, the chances ex­ceed 50 per­cent.

The shift in sen­ti­ment shows traders may be giv­ing more cre­dence to the Fed's pro­jec­tion of two more rate boosts this year, af­ter pol­icy mak­ers lifted their overnight bench­mark from near zero in De­cem­ber.

"June is cer­tainly still live," said Aaron Kohli, a fixed- in­come strate­gist in New York at BMO Cap­i­tal Mar­kets, one of 23 pri­mary deal­ers that trade with the Fed. "She's join­ing the rest of the FOMC -- ready to go in the com­ing months. Yields re­ally do need to reprice higher ma­te­ri­ally."

Yields on two- year notes, the coupon se­cu­ri­ties most sen­si­tive to Fed ex­pec­ta­tions, rose four ba­sis points, or 0.04 per­cent­age point, to 0.91 per­cent as of 2 p. m. New York time, ac­cord­ing to Bloomberg Bond Trader data. Yields hadn't risen for three straight weeks since March. The price of the 0.875 per­cent se­cu­rity due in May 2018 was 99 30/ 32. "It's ap­pro­pri­ate and I've said this in the past -- for the Fed to grad­u­ally and cau­tiously in­crease our overnight in­ter­est rate over time," Yellen said. "Prob­a­bly in the com­ing months such a move would be ap­pro­pri­ate." The Har­vard event's Fri­day af­ter­noon start time, head­ing into a three­day week­end, had some traders de­lay­ing hol­i­day get­aways. The bond mar­ket closed early Fri­day, min­utes af­ter Yellen wrapped up her ap­pear­ance, and will re­main shut May 30 in ob­ser­vance of the U. S. Me­mo­rial Day hol­i­day.

Sev­eral re­gional Fed pres­i­dents have sig­naled in re­cent weeks higher rates are ahead. San Fran­cisco Fed Pres­i­dent John Wil­liams and At­lanta Fed Pres­i­dent Den­nis Lock­hart said two or three in­creases are pos­si­ble in 2016, while Bos­ton Fed Pres­i­dent Eric Rosen­gren said the like­li­hood is higher than the mar­ket was pric­ing in.

Hedge- fund man­agers and other large spec­u­la­tors in the fu­tures mar­ket have al­ready ramped up bets on losses in two- year notes, hold­ing the big­gest short po­si­tion in the ma­tu­rity since 2014, ac­cord­ing to data as of May 24 from the Com­mod­ity Fu­tures Trad­ing Com­mis­sion.

The snap­shot pro­vided by those fig­ures fol­lowed the May 18 re­lease of min­utes from the Fed's April meet­ing, when of­fi­cials sig­naled a move in June would be war­ranted if eco­nomic data in­di­cate stronger growth and in­fla­tion.

Re­ports next week are fore­cast to show man­u­fac­tur­ing ex­pand­ing and growth in em­ploy­ment. The econ­omy grew at a slightly faster pace in the first quar­ter than ini­tially es­ti­mated, Com­merce Depart­ment data showed Fri­day.

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