Treasuries Drop a Second Straight Week as Fed Outlook Prevails

Treasuries registered back-to-back weekly losses for the first time this year as a lessening of turmoil in Greece reduced demand for the safest assets and the outlook for higher U.S. borrowing costs prevailed.

Yields on benchmark 10-year notes closed the week above 2 percent for the first time since January amid optimism that leaders in Greece and the European Union will compromise on the nation’s bailout program and as global economic prospects improved. Ten-year yields have climbed 41 basis points since falling to a 1 1/2-year low in January. The Federal Reserve will release minutes of its January meeting next week.

“We’ve had a pretty significant move,” said Jeffrey Klingelhofer, a money manager at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $89 billion. “Some of the pessimism is beginning to fade” on the U.S.

The 10-year yield increased nine basis points, or 0.09 percentage point, to 2.05 percent this week in New York, according to Bloomberg Bond Trader data. It touched the highest in more than five weeks on Friday.

Treasuries have fallen since the U.S. reported Feb. 6 that nonfarm payrolls and wages increased more than forecast in January, spurring speculation the Fed will raise rates in the first half of the year. Bonds had rallied last month as yields higher than those of 18 developed-nation peers attracted investors amid turmoil in Greece and moves by global central banks to avoid deflation.

Yield Differentials

A measure of volatility reached the highest in almost four months. Bank of America Merrill Lynch’s MOVE Index climbed to 95.4 on Tuesday, versus an average of 62 last year.

Ten-year note yields rose the most in a week Friday as data showed Germany’s gross domestic product grew 0.7 percent in the fourth quarter, more than twice as much as estimated, and the euro bloc’s economy expanded a more-than-forecast 0.3 percent. EU and Greek leaders extended negotiations over the weekend aimed at reaching a deal on future financing for Europe’s most-indebted country.

“There is a little bit more of the feel-good factor about Greece,” said Vincent Chaigneau, Paris-based global head of fixed-income and foreign-exchange strategy at Societe Generale SA, whose SG Americas Securities unit is one of the 22 primary dealers that trade with the Fed. “There is also an improving sentiment on global growth, and Treasuries have been sensitive as much to that as domestic news. This is all weighing on Treasuries.”

Fed Outlook

Traders now see a 55 percent chance the Fed will raise interest rates from virtually zero by September, up from 39 percent at the end of last month, fed fund futures show. The likelihood of an increase by December is 80 percent, compared with 63 percent on Jan. 30.

“Much of the move in Treasuries is spillover from the payrolls report and optimism that the economy is going OK,” said Ira Jersey, an interest-rate strategist at the primary dealer Credit Suisse Group AG in New York. “Inflation expectations hover where they have been, which is probably high enough for the Fed to hike rates.”

The central bank’s next policy meeting is scheduled March 17-18. Minutes of its last meeting, on Jan. 27-28, will be released on Feb. 18. Chair Janet Yellen delivers her semi-annual policy report to Congress Feb. 24-25.