US Treasury debt yields rose on Wednesday in thin trading, bolstered by gains in stocks world-wide as well as a growing view that the Federal Reserve could raise interest rates at least once this year despite risk seen from recent geopolitical events. Gains were led by US long-dated yields, data showed, but were still within recent trading ranges.
US stocks traded higher on the day, lifted by Microsoft earnings that easily beat expectations. At the same time, stronger-than-expected earnings from Europe's technology sector boosted the region's stock indexes. "It's a risk-on day, with equities higher, but we're looking at light volume," said Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York. "We have some key events coming over the next two days and next week so the market is consolidating."
On Thursday, the European Central Bank holds its monetary policy meeting weeks after Britain's surprise vote to leave the European Union. The ECB is expected to hold rates and adopt a wait-and-see stance. In late trading, benchmark US 10-year Treasury notes were down 6/32 in price for a yield of 1.578 percent, up from 1.558 percent late on Tuesday.
Contrary to what many in the market believe, New York-based Kirk Barneby, investment director of fixed income at Center Asset Management, thinks US yields are unlikely to stay low for long. "While the most recent trend, perhaps driven by panic buying following Brexit has been to lower yield levels, other market price-based indicators our discipline takes into account indicate the decline is not sustainable as bond market valuations have now fallen well below normal," Barneby said.
US 30-year bond prices fell 21/32 to yield 2.303 percent, up from 2.274 percent late Tuesday. US two-year notes slipped 1/32, with a yield of 0.714 percent. Yields were also helped by growing expectations the Fed could raise rates in December given a spate of generally upbeat US data since the release of a blockbuster US nonfarm payrolls report for June a few weeks ago.
Fed funds futures rates late Wednesday suggested a roughly 51 percent chance the Fed will hike at least once this year, according to CME Group's FedWatch, compared with less than 20 percent a few weeks ago. "Things are a little calmer now and US data overall are better than expected so we are calling for at least one rate increase in 2016 in December," said Cantor's Lederer.
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