US Treasury prices slipped on Tuesday, with the two-year yield touching a near-three-week high as comments from two top Federal Reserve officials rekindled bets the US central bank may raise interest rates by year-end if the economy improves further. New York Fed President William Dudley and Atlanta Fed chief Dennis Lockhart's comments concurred with data that showed moderate economic growth with inflation still running below the Fed's 2 percent goal.
"The Fed wants to telegraph that it is in the process of normalising rates and the market is underpricing a rate hike for this year," said Mike Lorizio, head of Treasuries trading at John Hancock Asset Management in Boston. Benchmark 10-year Treasury notes were down 6/32 in price for a yield of 1.575 percent, up 2 basis points from late on Monday. The two-year yield, which is sensitive to traders' views on Fed policy, was up 2 basis points at 0.750 percent after touching a near three-week peak at 0.758 percent, according to Reuters data.
Treasury prices were also under pressure on competition from higher-yielding corporate supply. Companies have raised nearly $89 billion through selling investment-grade bonds so far this month, putting the sector's issuance on pace for an August record, according to IFR, a unit of Thomson Reuters. Treasury prices rose in overseas trading due to losses in Asian equity markets as a rise in the yen against the dollar renewed worries about weaker Japanese exports.
The three major US stock indexes' decline from their record close set on Monday limited the drop in bond prices. The US bond market reversed its gains after New York Fed's Dudley told the Fox Business Network on Tuesday, "I think it's possible" to hike rates at a mid-September policy meeting. The Atlanta Fed's Lockhart said in a speech later on Tuesday that the US economy is likely strong enough for at least one interest rate increase before the end of 2016, with two hikes a possibility. Interest rate futures implied traders saw a 50 percent chance the Fed would raise rates at its December 13-14 policy meeting, up from 42 percent on Monday, according to CME Group's FedWatch program.