MW: Treasurys down on concern about rate-hike timing
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Treasurys prices dropped on Friday, sending 2-year yields up the most since August, after a media report revived concerns about when the Federal Reserve may have to raise interest rates.
Two-year note yields (UST2YR 1.00, +0.06, +6.06%) ,which move inversely to prices, rose 7 basis points to 0.99% in recent trading, after earlier topping 1% for the first time this month. Shorter-term securities are more sensitive to interest-rate expectations.
Ten-year note yields (UST10Y 3.47, +0.05, +1.46%) rose 4 basis points to 3.46%. A basis point is 0.01%.
In what some bond strategists called a re-hash of recent Fed speeches, a Financial Times story released during Asian trading hours intimated that the central bank may have to begin changing its language regarding how long it will keep rates low.
After every policy meeting since March, the Federal Open Market Committee has released a statement saying it anticipates "that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
"The markets will need to remember that despite the Fed's apparently elevated concern over inflation expectations, they do know that consumer wallets are still snapped shut, bank loan windows are mostly closed and unemployment is still rising," said Bill O'Donnell, head of Treasury strategy at RBS Securities. "We'll all need to remember that 'marketing' doesn't necessarily mean action."
The story noted that rising commodity prices and the weakening dollar are a "new wild card" for policy makers, though it's unlikely rates will rise before mid-2010.
It should come as no surprise that the market will experience more "front end volatility as we get closer to a hike, even if that hike is months and months away -- we think fourth-quarter of 2010 at the earliest," David Ader, head of government-bond strategy at brokerage CRT Capital Group, wrote in an email.
Investors and analyst also widely expect the Fed to begin retracting some of its easy monetary policy measures through other channels before moving the fed funds rate, which has been at a range of zero to 0.25% since December. It will withdraw liquidity from the financial system in other ways first, such as borrowing securities from the market or increasing the interest it pays on excess reserves, noted RBC Capital Markets.
Analysts have also pondered that the Fed could raise rates from the current record-low range, and still consider rates "exceptionally low." After all, a half-percentage point fed funds rate would still be the lowest at any time before the credit crisis.
The report far overshadowed the only economic report of the day, which showed resales of U.S. houses jumped 9.4% in September to a seasonally adjusted annual rate of 5.57 million, the highest in more than two years and stronger than predicted by analysts surveyed by MarketWatch.
