Treasuries outlook: longer-dated US bonds rise on 2015 rate-hike view

11 Oct, 2015

Prices on longer-dated US Treasuries rose on Friday in light, choppy trading, as several Federal Reserve officials hinted that an interest rate increase later this year remains possible even after the soft September payrolls report. Comments from New York Fed chief William Dudley, Chicago Fed President Charles Evans and Atlanta Fed chief Dennis Lockhart led investors to favor longer-dated government debt over their short-dated counterparts in the form of "curve flatteners," traders said.
"It's a reaffirmation that late 2015 is still the plan for a rate hike," Mike Lorizio, head of Treasuries trading at John Hancock Asset Management in Boston, said of the Fed officials' remarks. "Based on my forecast, yes I am" expecting to raise rates this year, Dudley told CNBC television. "But it's a forecast and we're going to get a lot of data between now and December. So it's not a commitment." Lockhart expressed a similar view, while Evans, who is known for his dovish policy stance, downplayed the importance of the timing on a rate lift-off. "While I favor a somewhat later lift-off than many of my colleagues, the precise timing for first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process," Evans said in a speech in Milwaukee.
As the Fed officials suggested a 2015 rate increase is possible, traders increased their curve-flattening positions, which involved reducing holdings of short-dated Treasuries and increasing stakes in long-dated issues. The yield on two-year Treasuries edged up fractionally to 0.641 percent, near its highest level in a week, while the five-year yield moved up 0.4 basis point to 1.403 percent after hitting its highest level in about 1-1/2 weeks.
Benchmark 10-year Treasuries prices erased losses to trade up 4/32 with a yield of 2.093 percent, down 1.5 basis points from late on Thursday. The 10-year yield briefly rose to 2.138 percent, its highest level in about two weeks. It gained about 10 basis points from its lowest level since April a week ago. The 30-year bond was up 14/32 points in price to yield 2.924 percent, down 2.2 basis points from Thursday. The yield briefly touched a two-week high of 2.970 percent. The US bond market will be closed on Monday for the US Columbus Day holiday.

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