TREASURIES-Yields on pace for biggest weekly gain in 6 months

May 20, 2016 Reuters

* 2-year, 10-year yields on track for biggest weekly rise since November

* Fed seen moving sooner than later to raise rates

By Dion Rabouin

NEW YORK, May 20 (Reuters) – U.S. Treasury prices were little changed on Friday as investors turned toward riskier assets such as stocks, but bonds remained on pace for one of their poorest weekly performances in six months on concerns that the Federal Reserve might lift interest rates sooner than expected.

For the week, yields for benchmark two- and 10-year Treasury notes rose the most since November, with most of that move coming after Wednesday’s release of minutes from the Fed’s policy meeting last month. The records revealed a pickup in discussion among policymakers about whether to raise rates at their next meeting in June, especially if the economy continued to show improvement.

After that news and relatively hawkish comments from key Fed policymakers, the probability for a June rate hike has leapt from around 4 percent at the start of the week to 30 percent on Friday, according to CME Group’s FedWatch site. Futures markets are predicting two rate increases this year as opposed to just one as recently as last week.

“It wasn’t really a surprise what (the Fed) wanted; it was just the veracity and pervasiveness of their desire to increase rates as early as June,” said market strategist Ellis Phifer of Raymond James in Memphis, Tennessee. “The speakers have been saying such, they’ve warned us that this was coming, but I think the minutes were confirmation of that.”

Rising expectations for rate hikes have come on the back of a spate of relatively robust economic data, including Friday’s stronger-than-expected existing home sales figures for April. Figures released earlier this week showed U.S. inflation rising in April by the most in three years, and the government last week reported the biggest rise in retail sales since March 2015.

“Obviously we’ve seen a number of key data points kind of turn the corner over the last week and a bit,” said analyst Stephen Casey of Cambridge Global Payments in New York. “You’ve basically got all that reinforcing the most recent Fed speeches we had running into Wednesday’s minutes release.”

On Friday, benchmark 10-year notes were unchanged in price to yield 1.85 percent, and 2-year note prices were fractionally lower, with their yields rising 1 basis point to 0.89 percent.

The drift came as investors turned back to rival assets like stocks to cap the week, with the U.S. equity benchmark S&P 500 Index rising 0.83 percent on Friday.

On the week, though, both two- and 10-year yields have risen 14 basis points, on track for the largest one-week gain since the first week of November.

(Reporting by Dion Rabouin; Editing by Lisa Von Ahn)

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