US Treasury debt prices fell on Thursday, with traders citing market speculation that the Federal Reserve might raise interest rates by half a percentage point when it meets next week. The benchmark 10-year note's yield hit a four-year high above 5.21 percent.
The two-year note's yield, which moves inversely to its price and responds closely to expectations for Fed monetary policy shifts, rose to 5.25 percent according to Reuters data, its highest since December 2000, and matching the level the market expects the Fed to raise its key overnight lending rate to on June 29.
Market analysts and traders cited a rumour that Fed officials, possibly including Chairman Ben Bernanke, had met with bond market participants on Wednesday.
Asked whether such a meeting had taken place, a spokesman for the Bond Market Association, an industry group, said: "All I can tell you is that we meet frequently with regulators and other federal officials as part of an ongoing dialogue." The spokesman added that the BMA doesn't go into specifics about its meetings.
"There is talk in some quarters that after meeting with Fed Chief Bernanke that a 50 basis-points rate hike next week is possible," wrote Marc Chandler, chief global currency strategist with Brown Brothers Harriman in New York in an email note.
But many traders expressed skepticism about the foundation of this speculation about a steeper rate increase than the 25 basis-points rise that US interest rate futures have currently priced in for next week.
"It seems unlikely on the face of it that Bernanke, after seemingly having lapsed from his clear and transparent communication goal in late April, would convey private information to bond traders", Chandler wrote.
Bernanke inadvertently roiled financial markets in early May after having made an offhand comment to a CNBC television reporter about remarks he had made in congressional testimony the prior week. He later said it was a lapse in judgement.
The Fed declined to comment on Thursday's rumours. The Fed is widely expected to boost interest rates by a quarter point at the June 28-29 meeting, taking official interest rates to 5.25 percent in an effort to slow inflation.
Andy Brenner, head of global fixed income at Hapoalim Securities in New York, said that the rumour of a 50 basis-point hike next week "is not credible."
However, fed futures have now priced in about a 90 percent chance that the Fed will raise rates again by 25 basis points when it meets in August rather than pausing in its campaign of rate increases.
Late on Thursday, the benchmark 10-year note US10YT=RR was trading 14/32 lower in price for a yield of 5.216 percent, the highest in over a month, up from 5.16 percent late on Wednesday.
"Driving the market is just a general sense that you have a lot of supply coming in the next week or so and we are getting closer to the FOMC meeting; that we have to take down the supply just before the Fed", said Rick Klingman, head trader on the US Treasury desk with ABN Amro in New York.
Treasury yields are making "a slow grind higher on peoples' expectations of the Fed", Klingman added. The Treasury Department will sell $22 billion of two-year notes on Tuesday and $14 billion of five-year notes on Wednesday. The two-day Federal Reserve policy-setting meeting ends with the Fed's interest rate decision and statement on Thursday.
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