Two-Year U.S. Yield Rise to Near 2015 Peak as Yield Curve Flattens

By Min Zeng 

        Yields on shorter-dated Treasury notes rose to a near-2015 high Thursday after a report showed the U.S. economy picked up speed in the second quarter and bolstered the case for the Federal Reserve to raise interest rates in September.
        While the 2.3% growth rate was below 2.7% forecast by economists, it still has quickened its pace from 0.6% during the first quarter, which was revised higher from a shallow contraction.
        The Federal Reserve didn't offer clear signals Wednesday about a rate increase in September, but analysts say the central bank's brighter assessment on the labor market suggests the door remains wide open for the central bank to act in that month.
        The report "confirms the pickup in the second quarter, which allows the Fed the leeway to tighten in September," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
        The yield on the two-year Treasury note, among the most sensitive to changes in the Fed's rate policy outlook, was as high as 0.747% after the data, according to Tradeweb. That was the highest intraday level since this year's peak of 0.753% reached on June 11. Yields rise as prices fall.
        The yield was recently at 0.735%, compared with 0.704% on Wednesday.
        As investors migrated money out of shorter-dated notes and into longer-dated bonds, the yield on the benchmark 10-year Treasury note pulled back to 2.277% compared with 2.308% right before the release. The yield was 2.279% on Wednesday.
        The Fed's ultra-loose monetary policy following the 2008 financial crisis has sent prices of many stocks and bonds to elevated levels, raising concerns about whether financial assets could hold up once the Fed starts a tightening campaign for the first time in nearly a decade.
        Shorter-dated Treasury notes have been lagging this month as investors are preparing for the Fed's tightening plan.
        In the past three tightening cycles, the yield on the two-year Treasury note rose at a faster pace than the yield on the 10-year Treasury note. That is because shorter-dated bond yields are pinned by the Fed's short-term policy rate so they are more vulnerable to a shift in the Fed's policy.
        Investors have been demanding a lower premium to hold the benchmark 10-year Treasury note instead of the two-year note. The shrinking premium is known as a flattening yield curve. On Thursday, the premium was 1.542 percentage points, the lowest in two months.
        Many money managers don't expect the 10-year Treasury yield to rise sharply in an environment of sluggish global economic growth, still contained inflation and a low-yield world, with many other central banks either cutting interest rates or implementing asset purchases.
        Some investors say the Fed's go-slow approach in the new tightening cycle would also keep a lid on the rise in the 10-year bond yield, unless economic conditions change to push the central bank to tighten at a more aggressive pace than investors expect. Few investors expect the 10-year yield to rise to 3%--a level the yield last traded at in early 2014--during the balance of the year.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        July 30, 2015 09:26 ET (13:26 GMT)

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