By Min Zeng
U.S. Treasury bonds fell broadly Tuesday, with the two-year note's yield rising to near the highest since 2009, after Federal Reserve Chairwoman Janet Yellen signaled that the door remains open for an interest-rate increase as soon as next month.
Ms. Yellen started her two-day semiannual congressional testimony on monetary policy Tuesday morning. If job gains and rising inflation continue to progress as the Fed expects, an increase in the benchmark federal-funds rate likely would be appropriate "at our upcoming meetings, " Ms. Yellen said in remarks prepared for delivery for her testimony before the Senate Banking Committee.
Higher interest rates by the U.S. central bank tighten money flowing into the broader economy and tend to push up market interest rates, shrinking the value of outstanding bonds. Yields on short-term Treasury debt are particularly sensitive to the Fed's interest-rate-policy outlook.
The comment sent the two-year note's yield to as high as 1.25%, according to Tradeweb, near 1.261% settled on Dec. 15, which was the highest close since Aug 2009. Yields rise as bond prices fall.
The yield was recently at 1.246%, compared with 1.202% Monday.
The yield on the benchmark 10-year Treasury note was 2.495%, compared with 2.434% Monday.
The Fed raised short-term interest rates in December for the second time since 2006 and projected three increases during 2017. But policy makers signaled there was no hurry to tighten policy any time soon during its Jan. 31-Feb. 1 policy meeting.
Many investors and analysts have seen a very low probability for the Fed to raise rates next month, citing the uncertainty surrounding U.S. fiscal policy.
"She is putting March back in play a bit" and reminds investors that a rate increase in March isn't completely off the table, said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc. "She doesn't want to wait too long to tighten."
The interest-rate futures market suggested many aren't convinced the Fed would raise rates next month.
Fed funds futures, used by investors to bet on the Fed's interest rate policy, showed 18% odds of a rate increase by the March meeting, compared with 13% Monday, according to data from CME Group.
The odds for the Fed to raise interest rates by the June meeting were 71%, compared with 68.3% Monday. The odds were 96% for the December meeting.
The 10-year yield has risen over the past four sessions after a recent slide. Some investors embraced the reflation trade again after President Donald Trump last Thursday pledged to unveil a tax plan in coming weeks. Lower taxes are part of his campaign promise of expansive fiscal policy, which have driven investors to sell Treasurys, wagering on a stronger economy and higher inflation.
Still, the 10-year yield remains below a two-year high of 2.6% it reached in mid-December, reflecting some investors' caution until the dust settles on Mr. Trump's policy details. Political risk in Europe, especially uncertainty surrounding the presidential race in France, also provides some support for haven assets, keeping a lid on bond yields.
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
February 14, 2017 11:05 ET (16:05 GMT)
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