(Bloomberg) - Treasury yields resumed their climb Thursday, with key benchmarks surging as traders braced for the possibility that the Federal Reserve will raise interest rates by half a percentage point at each of its next three meetings.
The policy-sensitive two-year yield climbed as much as 15 basis points to a fresh cycle peak above 2.73%, the highest since late 2018, after Fed Chair Jerome Powell said during an International Monetary Fund panel discussion that “it is appropriate in my view to be moving a little more quickly.”
“I think there’s something in the idea of front-end loading,” Powell said, adding that a half-percentage point hike in May “is on the table.”
The five-year rose as much as 15 basis points to 3.01% as traders priced in half-point rate hikes at its meetings in May, June and July. Selling pressure extended across the Treasury curve, with the 7-year yield rising 14 basis points to a session high of 3.02%, thought yields have since backed slightly off their session highs.
Selling pressure extended across the Treasury curve, with the 7-year yield rising 14 basis points to a session high of 3.02%.
The renewed bearish tone in the bond market was spurred in part by a selloff in government debt from the euro-area on heightened expectations for rate hikes later this summer in the region. The German two-year yield surged to 0.199%, its highest level since 2014 and up from minus 0.7% in March. The U.K. two-year gilt yield climbed 18 basis points to 1.76%, its highest level since 2009.
“Fifty-basis-point hikes in May and June are reasonable, while 50 in July will depend on the how the data plays out in the next few months,” said Ben Jeffery, rates strategist at BMO Capital Markets.
Such a set of hikes would represent the sharpest tightening since January 1982 when the Fed raised its benchmark by 3 percentage points in one go. The last half-point increase was in May 2000. In subsequent cycles, the U.S. central bank raised rates exclusively in quarter-point steps that were clearly telegraphed to the bond market.
With headline and core inflation running at the fastest annual rates since the early 1980s, Powell and other Fed officials have signaled they’re prepared to raise rates in half-point increments if necessary, after the quarter-point hike in March. St. Louis Fed President James Bullard even flagged the potential the central bank might have to consider a 0.75 point increase.
All told, the U.S. rates market now expects 2.42 percentage points of additional rate hikes by the Fed’s December meeting, a rise of about 30 basis points since the close on Monday. The benchmark rate is currently in a range of 0.25-0.50%.
Selling pressure in the front end was triggered in part by large block sales in both the two-year note and September 2022 eurodollar futures contracts. Fed-dated OIS contracts priced in 105 basis points of rate hikes over the next two policy meetings, or an additional 5 basis points more than two 50 basis point moves.
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By Michael MacKenzie
