March 1, 2017 / 8:15 PM / 5 months ago

TREASURIES-2-year yield hits highest since 2009 on rate hike bets

3 Min Read

(Updates to U.S. afternoon trading, adds analyst quote, data)

By Dion Rabouin

NEW YORK, March 1 (Reuters) - U.S. Treasury yields rose broadly on Wednesday, with the 2-year's hitting a more than seven-year high, on increased expectations that the Federal Reserve will raise U.S. overnight interest rates at its March meeting.

Fed funds futures prices showed investors saw a more than 65 percent chance of a rate hike this month after comments from two central bank officials on Tuesday.

New York Fed President William Dudley, one of the most influential U.S. central bankers and a permanent voter on the Federal Open Markets Committee, said the case for tightening monetary policy soon had become "a lot more compelling." San Francisco Fed President John Williams said: "A rate increase is very much on the table for serious consideration" at the March 15-16 meeting.

Yields on the 2-year Treasury note rose to 1.308 percent, their highest since August 2009.

"It was quite unexpected, the comments from Dudley," said Bruno Braizinha, interest rate strategist at Societe Generale. "He must have felt he needed to get his message across very forcefully. And the market took it very seriously."

Longer-dated Treasuries also saw substantial selling after the release of January's data on personal consumption expenditure, or PCE, that showed the Fed's favored measure of inflation posting its largest monthly increase in four years.

The selloff was exacerbated by strong gains in U.S. stocks, which reduced the appetite for safe-haven U.S. government debt. The Dow moved above 21,000 points for the first time in history and the S&P 500 and Nasdaq both touched all-time intraday highs.

"Between the risk-on move in equities and this fear that we could get a rate hike (in two weeks) we saw a lot of traders scramble and start to price in that eventuality, which meant they had to start selling a lot of their bonds," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

The yield on 10-year notes rose to 2.471 percent, the highest since Feb. 16. Prices on 30-year bonds fell by more than 2 points, pushing yields to 3.074 percent, the highest since Feb. 16.

The data followed a Tuesday night speech from U.S. President Donald Trump, who was short on specifics about his already proposed $1 trillion stimulus package, tax cuts and regulation rollbacks. All of those would likely add to U.S. inflation, which is nearing the Fed's 2 percent target. (Reporting by Dion Rabouin; Editing by Lisa Von Ahn and Chizu Nomiyama)

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