February 14, 2017 / 7:59 PM / 5 months ago

TREASURIES-Yields rise as Yellen warns about delaying rate hike

3 Min Read

(Adds details on Fed expectations, quotes, updates prices)
    * Yellen gives hawkish testimony before Senate
    * 10-year yields highest in more than a week

    By Karen Brettell
    NEW YORK, Feb 14 (Reuters) - U.S. Treasury yields jumped on
Tuesday after Federal Reserve Chair Janet Yellen said it would
be unwise to wait too long to raise interest rates, striking a
more hawkish tone than investors expected.
    The U.S. central bank will likely need to raise rates at an
upcoming meeting, Yellen said, although she flagged considerable
uncertainty over economic policy under the Trump administration.
    Yellen said delaying rate increases could leave the Fed's
policymaking committee behind the curve and eventually lead it
to hike rates quickly, which she said could cause a recession.
 
    "What we are seeing is a down trade on the headline that
waiting too long to tighten monetary policy would be unwise. I
think that's the biggest headline that everyone reacted to,"
said Ian Lyngen, head of U.S. rates strategy at BMO Capital
Markets in New York.
    Benchmark 10-year notes were last down 10/32 in
price to yield 2.47 percent, after rising as high as 2.50
percent, the highest since Feb. 3, where the notes have
technical support.
    The yield curve between five-year notes and 30-year bonds
 flattened to 109 basis points, the lowest since
Feb. 1.
    "The comment that it's unwise to keep rates this low for
this long, that's what everybody keyed in on and it just brought
the market down," said Tom di Galoma, managing director at
Seaport Global Holdings.
    Before the comments, "people weren't necessarily sure she
was going to be hawkish and a lot of folk were buying the belly
and selling the long-end," di Galoma said.
    Intermediate-dated notes, which are also referred to as the
"belly" of the U.S. yield curve, typically underperform when
rate increases are viewed as more likely.
    Traders are now pricing in an 18 percent chance of an
interest rate increase at the Fed's March meeting, up from 13
percent on Monday, according to the CME Group's FedWatch Tool.
    The chances of a hike by the Fed's June meeting rose to 71
percent, from 65 percent.
    Richmond Fed President Jeffrey Lacker also said on Tuesday
that the Fed will likely have to raise interest rates more
rapidly than financial markets currently expect given that any
new policies by the Trump administration, while uncertain, will
force the Fed's hand. 
    Yellen will also testify before the House Financial Services
Committee on Wednesday.
    Economic releases, including consumer price inflation,
manufacturing and retail sales data, are also in focus this
week.

 (Editing by Meredith Mazzilli and Cynthia Osterman)

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