US Treasury debt prices slipped on Monday as further tough talk on inflation from the Federal Reserve reinforced expectations that the central bank will raise interest rates for a 17th time next week.
The expectation of higher rates pushed two-year Treasury note yields, which are sensitive to near-term shifts in Fed monetary policy, to their highest since late 2000, just below 5.20 percent. But the weakest reading of homebuilder sentiment for more than a decade helped trim Treasuries' price losses.
A chorus of warnings on inflation from the Fed this month has convinced investors that the US central bank will raise official interest rates at its policy meeting on June 28-29.
"Expectations for further tightening are certainly robust," said Wan-Chong Kung, senior portfolio manager at FAF Advisors in Minneapolis, Minnesota. US economic growth is decelerating but is still strong enough to induce the Fed to continue raising rates, forcing Treasuries prices lower, she said.
Two-year notes were trading 1/32 lower in price for a yield of 5.18 percent, up from 5.17 percent late on Friday. Bonds' yields move inversely to their prices.
Benchmark 10-year notes, which tend to respond closely to investors' long-term expectations for the economy, were down 2/32 in price for a yield of 5.15 percent, up from 5.14 percent late on Friday. Treasuries prices came slightly off their lows after a report showing US homebuilder sentiment in June sank to its lowest level in more than a decade.
"The weakness in housing as seen in this index is not new news. The question now shifts to how/when/if it impacts the broader consumer side," David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, wrote in an e-mail note on the June NAHB homebuilders index, which, at 42, was at its lowest reading since 1995.
The next data focus for the Treasury market is likely to be US May housing starts, with economists' median forecast from a Reuters survey for a 1.850 million annual rate, little changed from the previous month. The report is due for release on Tuesday at 8:30 am.
Atlanta Fed President Jack Guynn was again tough on inflation on Monday, giving a speech with content similar to one he delivered on June 7. Guynn said core inflation may have already breached its acceptable upper level and that the Fed must be ready to reset policy if the outlook worsened. "The speeches in general will stay with that hawkish tone until they start to see some potential slowing down in inflation," said Adam Brown, director of the Treasury trading desk at Barclays Capital in New York.
The Fed's inflation warnings have been strong enough in recent weeks that some investors have been mulling the possibility of a half percentage point rate increase at the late June meeting, to 5.5 percent.
The Fed has raised rates a quarter point at each of its last 16 policy meetings beginning in June 2004, taking the target for the benchmark overnight lending rate to 5 percent. With little in the way of economic data this week, Treasury yields were generally expected to remain range-bound until next week's Fed meeting.
The five-year Treasury note was 2/32 lower in price for a yield of 5.12 percent, up from 5.11 percent late on Friday. The 30-year bond was 3/32 lower for a yield of 5.18 percent, up from 5.17 percent.