Treasurys fell from the highest levels since early June after Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank is almost ready to raise interest rates.
U.S. 10-year yields rose after earlier touching their 200- day moving average, a level some traders use to assess whether valuations are stretched. On Monday, a collapse in crude prices and weaker-than-forecast manufacturing data fueled speculation the Fed would hold off on raising interest rates as soon as its next meeting, in September.
Lockhart, a voting member of the Federal Open Market Committee, told the Wall Street Journal in an interview published Tuesday that it would take significant deterioration in economic data to convince him to put off increasing borrowing costs next month.
“Even after some of the weak data we’ve seen of late, he’s saying irrespective of those numbers we should still be moving ahead in September,” said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. He’s “pushing back against some who thought the time line was changed.”
The yield on the benchmark 10-year note climbed six basis points, or 0.06 percentage point, to 2.21 percent as of 2:52 p.m. in New York, according to Bloomberg Bond Trader data. The 2.125 percent security due in May 2025 fell 1/2, or $5 per $1,000 face amount, to 99 1/4. The 200-day moving average of the maturity’s yield is about 2.14 percent.
Treasurys maturing in three through five years led losses Tuesday, shrinking the yield gap with 30-year bonds. The difference between five- and 30-year yields shrank to the smallest since April.
The chance of an interest-rate increase in September rose to 46 percent Tuesday from 38 percent earlier Tuesday, assuming that the effective fed funds rate will average 0.375 percent after the increase. The likelihood of a boost at or before the December meeting rose to 75 percent from 68 percent.
Rebounding oil prices also hurt bonds by cooling speculation that inflation will slow and prevent the Fed from raising interest rates.
West Texas Intermediate oil futures gained about 1.9 percent, after dropping more than 7 percent over the previous three days.
“You have weakness in the back-end with the bounce in oil,” said Edward Acton, a U.S. government-bond strategist in Stamford, Connecticut, at RBS Securities, one of the 22 primary dealers that trade with the Fed. “It’s difficult to anticipate energy prices. It seems like we’re closer to a bottom than we were several weeks ago.”
Treasurys remained lower after a report showed U.S. factory orders rose 1.8 percent in June, in line with economists’ forecasts, after a revised 1.1 percent drop the prior month.
The difference between yields on 10-year Treasury inflation-protected securities and the nominal equivalents rose to about 1.7 percentage points after touching 1.67 percentage points Monday, the lowest since March. Known as the break-even rate, the gauge reflects average inflation expectations over the next 10 years.
The collapse that’s driven crude oil about 50 percent lower in the past year has complicated the Fed’s quest to meet its dual mandate of price stability and full employment, and start raising interest rates.
Traders are concerned that falling inflation expectations may delay any Fed increase even though the labor market is strengthening. A report last week showed U.S. wages rose in the second quarter at the slowest pace on record. The central bank has kept its target interest rate near zero since 2008.
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