US yields rise after two-day drop, Fed comments

NEW YORK, June 16 (Reuters) – US Treasury yields rose on Friday, with the benchmark 10-year yield gaining ground after two straight days of declines as comments from two Federal Reserve officials pointed to more interest rate hikes this year from the central bank.

In the first comments since the Fed’s policy announcement on Wednesday, officials from the central bank took a hawkish tilt toward more rate hikes and pushed yields higher.

The Fed on Wednesday kept rates unchanged at the 5.00%-5.25% range but indicated 50 basis points (bps) of hikes may be needed by the end of the year because of a stronger-than-expected economy and slower decline in inflation.

“In the last year there have been periods where it takes investors a couple of months to really come to terms with what the Fed has said and to believe the Fed, to the extent to actually price it in, so that could be the scenario that we’re in now,” said Bill Merz, head of capital market research at US Bank Wealth Management in Minneapolis.

“Or we’re in that period where we’re probably going to get very consistent messaging from the Fed that says, ‘We probably need to hike a couple more times,’ and that will gradually erode the market’s resistance, or the data starts to change and the Fed can start to mark to market their guidance and maybe it converges the other way with market pricing,” Merz said.

The yield on 10-year Treasury notes was up 4.7 basis points at 3.775%. The yield had fallen 11.1 basis points over the prior two sessions following the Fed announcement but was still on track for a second straight week of gains.

Yields briefly pared gains after the preliminary reading of consumer sentiment from the University of Michigan came in at 63.9, above the 60.0 estimate, and a four-month high.

The yield on the 30-year Treasury bond US30YT=RR was up 1 basis point at 3.859%.

Markets are currently pricing in a 74.4% chance of a 25-basis-point rate hike at the Fed’s July meeting, up from 67% a day ago, according to CME’s FedWatch Tool.

In contrast to the Fed, the European Central Bank (ECB) raised borrowing costs to their highest level in 22 years on Thursday and left the door open to more hikes in a sign that global central banks may no longer be acting as closely in concert as they have been in recent years.

On Friday, the Bank of Japan kept intact its ultra-easy monetary policy even though inflation has been stronger than expected and signaled it would remain a dovish outlier to most other global central banks.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 95.6 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 7.9 basis points at 4.727%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.209%, after closing at 2.210% on Thursday.

The 10-year TIPS breakeven rate was last at 2.23%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; editing by Jonathan Oatis)