NEW YORK: Yields on US Treasuries with longer-dated maturities edged up to their highest in more than two weeks on Monday on a modest rise in expectations that the US Federal Reserve could raise short-term interest rates by year-end.
Friday's release of July's non-farm payrolls report, which showed US employers added 255,000 jobs, rekindled expectations the Fed may again be leaning toward raising the interest rate banks charge each other for overnight loans of federal funds.
That sparked a broad sell-off in Treasuries on Friday, with yields on 10-year notes rising by the most since May and on 2-year notes, which are more sensitive to Fed policy expectations, by the most in more than a year. Fed funds futures prices showed traders now see nearly a 50-50 chance the US central bank will raise rates by December, according to CME Group's Fed Watch tool.
Traders had priced in as little as a 30 percent chance of a rate hike by year-end as recently as last week. "People don't appreciate the extent to which the (non-farm payrolls report) continues to have an impact throughout the month. It's an impulse that fades over time, but can last for a good chunk of the month," said Aaron Kohli, interest rates strategist at BMO Capital Markets.
But investors continue to expect a slow and steady Fed, Kohli said, with the probability for a rate hike before December remaining well below 50 percent. FedWatch showed investors see just a 21 percent chance of a rate increase when policymakers meet next month.
"The market is caught between this fundamental improvement or what seems like a continuation of the strength of the US economic picture and a Fed that is likely on hold in the near- to mid-term," Kohli said. "I do think that the problem for the Fed is that they need everything to be close to perfect by year-end for them to go. What it would take to derail them is I think a lot smaller than they like to admit."
Benchmark 10-year Treasury notes were little changed in price to yield 1.582 percent in a quiet session with no data due.
Thirty-year Treasury bonds were also flat in price to yield 2.302 percent.
Yields on both Treasuries had earlier risen to their highest since July 21.
The 2-year note was little changed from Friday's close, with its yield at 0.73 percent.