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Treasuries Head for Weekly Loss Led by Two-Year Notes After Fed

March 21 (Bloomberg) -- Treasuries fell this week, with the two-year yield poised for its biggest climb in nine months, as traders adjusted to signs the Federal Reserve may raise benchmark rates sooner and at a quicker pace than anticipated.

Treasuries may continue the selloff before the sale of $96 billion of two-, five- and seven-year fixed-rate securities in the three days starting March 25. The Federal Open Market Committee severed a link between the benchmark rate and a specific level of unemployment this week and policy makers predicted higher target rates for the end of next year and 2016.

“Even though some of the recent data may not be consistent with rates rising early next year or even later this year, the market is starting to price in that possibility following the Fed’s decision and comments,” said Alessandro Giansanti, a senior rates strategist at ING Bank NV in Amsterdam. “Yields will continue to rise.”

The two-year note yielded 0.43 percent at 7:27 a.m. in New York, climbing nine basis points, or 0.09 percentage point, this week, according to Bloomberg Bond Trader prices. The weekly increase was the biggest since the five days through June 21. Benchmark 10-year yields were at 2.78 percent, up 12 basis points from March 14. The 2.75 percent note due in February 2024 rose 1 1/32, or $10.31 per $1,000 face amount, this week to 99 25/32.

Japan’s markets were shut today for a national holiday.

Yellen’s Measure

The Treasury will sell $32 billion in two-year fixed-rate notes, $35 billion in five-year debt and $29 billion in seven- year securities next week. It will also sell $13 billion in two- year floating-rate notes on March 26.

“The market is pricing in less than the median FOMC voter and there should be more risk premium in the curve now that we don’t have forward guidance,” said Johnson. Adding to the pressure is the fact that the market has yet to get a “measure” of Fed Chair Janet Yellen, he said.

Yellen signaled this week that the Fed’s key rate may rise by the middle of next year. The central bank said it will look at a wide range of data in determining when to lift its benchmark interest rate from near zero, including the labor market, inflation expectations and financial markets, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate.

Fed officials predicted their target rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market.

Inflation Expectations

Treasury trading volume dropped 15 percent to $477 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose to $582 billion on March 13, the highest in more than nine months, according to ICAP.

The gap between the yields on the 10-year note and the 30- year bond narrowed to as little as 85.6 basis points yesterday, the least since May 2010.

U.S. 10-year break-even rate dropped for a fourth day after the sale of $13 billion of Treasury Inflation Protected Securities yesterday attracted below average demand a day after Yellen signaled inflation isn’t a “significant concern.”

The gap between 10-year Treasuries and similar-maturity TIPS, a gauge of market inflation expectations, was at 2.15 percentage points, compared with 2.18 percentage points at the end of last week.

Inflation measured on a 12-month basis has been below the Fed’s 2 percent goal for almost two years, and prices rose 1.2 percent for the year ending January.

U.S. index-linked bonds underperformed their nominal peers this month, declining 1.1 percent through yesterday, according to Bank of America Merrill Lynch Bond Indexes. Treasuries dropped 0.6 percent.

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