Short-dated US yields edge up on rate-hike bets

NEW YORK: Short-dated US Treasury yields rose on Monday, with the two-year yield hovering at its highest in two months, as traders bet the Federal Reserve may raise interest rates as early as June if the economy shows further improvement.

This view on a looming rate hike was reinforced by comments from top Fed officials following the release of minutes on the central bank's April policy meeting last Wednesday. The record of the meeting surprised investors as it suggested policy-makers were prepared to increase policy rates next month.

Prior to the minutes, traders had reckoned there was nearly no chance the Fed would raise rates in June.

"The market has finally got the message," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey. "The minutes shook up the market as the Fed is preparing it for a rate hike."

On Monday, St. Louis Fed President James Bullard said higher expectations on a rate increase is "probably good," while San Francisco Fed chief John Williams said a forecast for two to three rate hikes in the rest of 2016 is "about right."

U.S. interest rates futures suggested on Monday traders saw a 31 percent chance of a June rate rise, compared with about 4 percent a week earlier, Reuters data showed.

The yield on two-year Treasury yield hit 0.905 percent, within striking distance of the two-month peak of 0.920 percent set last Thursday.

Benchmark 10-year Treasury notes were up 2/32 in price with a yield of 1.842 percent, down 1 basis point from Friday.

The yield spreads between short- and long-dated Treasuries shrank as traders favored longer-dated issues if the Fed were to raise short-term rates faster than they had anticipated.

The gap between two-year and 30-year yields shrank to 1.72 percent, the tightest since December 2008 after the Fed adopted a near-zero rate policy to combat a recession worsened by the global credit crisis, according to Tradeweb.

Shorter and medium dated Treasuries were under additional pressure as investors made room for $88 billion in supply of these maturities later this week.

The Treasury Department will sell $26 billion of two-year notes on Tuesday ; $34 billion in five-year debt on Wednesday and $28 billion in seven-year notes on Thursday.