US Treasury yields rose to more than one-month highs on Friday as investors considered whether the Federal Reserve is likely to raise interest rates at its September meeting, after hawkish but noncommittal comments by Fed Chair Janet Yellen. Speaking at the annual gathering of central bankers in Jackson Hole, Wyoming, Yellen said the case for a US interest rate increase has strengthened in recent months because of improvements in the labor market and expectations of solid economic growth.
She did not indicate when the US central bank might raise rates.
Yellen's comments were "slightly hawkish," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "Has the case for a rate hike strengthened? Yes. Is it definitive? No" Benchmark 10-year notes were down 16/32 in price to yield 1.63 percent, the highest since June 24, and up from 1.56 percent before the comments. Yields initially rose to 1.60 percent on Yellen's more hawkish tone, before moving in the opposite direction and dropping as low as 1.53 percent.
Bonds then resumed weakening after Fed Vice Chair Stanley Fischer said Yellen's speech was consistent with expectations for possible interest rate increases this year. The difference between the yields of two-year notes and 30-year bonds fell to 142 basis points, marking the flattest yield curve since 2007. Investors have been searching for new signals on whether an increase will be on the table at the Fed's September meeting after other officials including New York Fed President William Dudley said it is a possibility.
"September is not probable, but it's certainly possible," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "Right now, the market has a September 25-basis-point hike priced in with about one-in-four probability, and I think in light of those comments the true number should be closer to 50-50, and December should be north of 50 percent," LeBas said. An increase at the Fed's December meeting is seen as more likely if the US central bank raises rates once this year.
Fed Governor Jerome Powell also said on Friday that the Fed should raise interest rates in a cautious and patient manner. Bonds were little changed earlier on Friday after data showed that US economic growth in the second quarter was slightly weaker than initially thought as businesses aggressively ran down inventories, offsetting a spurt in consumer spending.