Treasury yields jump

US Treasury yields jumped on Tuesday after Federal Reserve Chair Janet Yellen said it would be unwise to wait too long to raise interest rates, striking a more hawkish tone than investors expected. The US central bank will likely need to raise rates at an upcoming meeting, Yellen said, although she flagged considerable uncertainty over economic policy under the Trump administration.
Yellen said delaying rate increases could leave the Fed's policymaking committee behind the curve and eventually lead it to hike rates quickly, which she said could cause a recession. "What we are seeing is a down trade on the headline that waiting too long to tighten monetary policy would be unwise. I think that's the biggest headline that everyone reacted to," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
Benchmark 10-year notes were last down 10/32 in price to yield 2.47 percent, after rising as high as 2.50 percent, the highest since February 3, where the notes have technical support. The yield curve between five-year notes and 30-year bonds flattened to 109 basis points, the lowest since February 1. "The comment that it's unwise to keep rates this low for this long, that's what everybody keyed in on and it just brought the market down," said Tom di Galoma, managing director at Seaport Global Holdings.
Before the comments, "people weren't necessarily sure she was going to be hawkish and a lot of folk were buying the belly and selling the long-end," di Galoma said. Intermediate-dated notes, which are also referred to as the "belly" of the US yield curve, typically underperform when rate increases are viewed as more likely.
Traders are now pricing in an 18 percent chance of an interest rate increase at the Fed's March meeting, up from 13 percent on Monday, according to the CME Group's FedWatch Tool. The chances of a hike by the Fed's June meeting rose to 71 percent, from 65 percent. Richmond Fed President Jeffrey Lacker also said on Tuesday that the Fed will likely have to raise interest rates more rapidly than financial markets currently expect given that any new policies by the Trump administration, while uncertain, will force the Fed's hand.