Treasury Yields Surge As Traders Favour More Fed’s Hikes

As speculators favoured two more looming Fed rate hikes, US Treasury rates soared on Thursday, reaching their highest levels since March. Trading participants bet that the Fed will increase rates twice more this year as a result of strong economic growth data.

The two-year rate increased by as much as 18 basis points to 4.89%, the most daily increase since March for short-maturity yields, which are more sensitive to changes in the Fed’s policy rate.

Swap contract rates that refer to upcoming Fed policy meetings have been repriced to levels that imply the US central bank will increase its federal funds rate target range by one-quarter of a percentage point by September. After pricing in more than half earlier in the session, they now only factor in around half of a subsequent quarter-point increase.

The outlook for Fed policy changes “has been mispriced.” Treasury securities with inflation protection saw an increase in yields as well, with the five-year rate reaching 2% for the first time since 2008. US economic data released on Thursday revealed that first-quarter growth was faster than anticipated and that new applications for unemployment benefits surprisingly decreased, indicating the resilience of the labour market.

At succeeding policy sessions, Fed Chair Jerome Powell declared he would not rule out further interest-rate rises. The yields on longer-dated Treasury securities increased less, furthering the curve’s inversion.

The difference between the two-year and 10-year rates was roughly 107 basis points, or 5 basis points less than the most extreme levels in decades that were recorded in March. If second-rate-hike expectations shift to September, the 10-year, which increased by as much as 16 basis points to 3.866%, is “at risk of a breakout” to 3.9% and higher, with potential to 4%, last seen in March.

Banks have been preparing for calendar-based demand to buy bonds based on their relative performance compared to stocks as the second quarter comes to a conclusion.