Fed Focus Flattens Yield Curve

Enough distractions! Treasury investors are turning their attention back to the business of when U.S. interest rates go up.

The yield curve has flattened the most in four months in a week when Greece signed a deal to secure more bailout aid and a bear-market rout in Chinese stocks stabilized, allaying concern that turmoil abroad would delay the Federal Reserve’s first rate increase since 2006. Fed Chair Janet Yellen made it plain over two days of testimony before Congress this week that she believes the central bank can raise interest rates in 2015.

“The uncertainty around Greece and China could be over, and that means the market theme is shifting to the probability of a Fed rate hike — and the most important thing is when,” said Hiroki Shimazu, a senior market economist at SMBC Nikko Securities Inc. in Tokyo. Treasuries are too expensive, and the 10-year yield will advance to around 3 percent by year-end, he said.