Treasuries declined, with 10-year yields touching the highest level in three weeks, after a private report showed companies in the U.S. added more jobs than forecast in February, backing speculation the Federal Reserve will raise interest rates this year.
Yields on two-year notes, the maturity most sensitive to Fed policy expectations, climbed to the highest in more than a month. A bond-market measure of inflation expectations known as the 10-year break-even rate climbed for a ninth day.
Benchmark 10-year notes started March with their biggest selloff since December after a manufacturing report on Tuesday exceeded forecasts, diminishing concern that global growth will force the U.S. into a downturn. Investors added to wagers that the Fed will tighten policy this year after officials lifted rates in December for the first time in almost a decade and signaled four increases this year. Policy makers meet March 15-16.
“We had a big risk-off situation in the first part of the year when 10-year Treasuries rallied big time,” said Martin van Vliet, senior interest-rate strategist at ING Groep NV in Amsterdam. “Fed rate hikes were completely priced out. We see it coming back a bit now given yesterday’s hopeful ISM numbers, so markets are playing with the idea that the Fed could hike once more this year.”
Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to 1.85 percent as of 8:55 a.m. New York time, according to Bloomberg Bond Trader data. The yield touched the highest since Feb. 8. The 1.625 percent security due in February 2026 fell 6/32, or $1.88 per $1,000 face amount, to 98. Yields climbed nine basis points Tuesday, the biggest jump since Dec. 14.
Two-year note yields rose as much as four basis points to 0.88 percent. Treasuries have returned 2.5 percent this year through Tuesday, according to Bloomberg World Bond Indexes.
The probability the Fed will raise rates this year is about 66 percent, futures prices compiled by Bloomberg indicate. The figure has climbed from as low as 11 percent in February. Of 59 economists surveyed by Bloomberg, 49 predict the Fed will leave the upper end of its target band for the federal funds rate at 0.50 percent in its March meeting. The remaining 10 forecast it will increase the figure to 0.75 percent.
The minutes of the Fed’s most recent meeting held Jan. 26-27 showed a number of participants stressed the importance of getting people to understand that monetary policy is “data dependent” and not on a set course. The Fed is scheduled to issue its Beige Book overview of economic activity Wednesday.
If the Fed “delivers at least one more hike later this year, we would expect 10-year Treasuries to at least move back to the 2 percent level,” ING’s van Vliet said. “We are not there yet.”
The U.S. added 214,000 jobs last month, after economists surveyed by Bloomberg called for an advance of 190,000, figures from the ADP Research Institute in Roseland, New Jersey, showed Wednesday. A Labor Department report March 4 is forecast to show the U.S. gained 195,000 jobs in February, according to a Bloomberg survey of economists.