US Treasuries slide as Fed talks of tightening

Treasuries once again found upward pressure early on Wednesday, pushing yields lower across the curve despite solid improvement seen in February new home sales data. The move also rebuffs increased Fed chatter suggesting support for a next move in the Fed Funds rate to come in April, this time coming overnight from Philadelphia Fed President Harker and morning comments by St. Louis Fed President Bullard that furthered the sentiment. 

Overall, the 2-year yield found some downward pressure, holding just above the 0.85%-mark, alongside a greater decrease seen in the 10-year yield, breaking below 1.90%. Markets now look ahead for durable goods orders and initial jobless claims data on Thursday, ahead of final 4Q15 GDP revisions on Friday. 

Although the sentiment has clearly grown in support of an April hike, with scaled back expectations for only 50 bps of additional tightening in 2016 by actual voting members suggests that a “wait-and-see” approach appears to be preferred. 

We continue to expect the Fed will likely take the step to raise rates initially in June, followed by an additional 25 bps move likely to be seen at either the September or December FOMC meeting. As oil prices continue to rebound we anticipate upward pressure on inflation is likely to present itself. 

However, this will initially be treated as more likely transitional. However, should inflation expectations react strongly; it could force a reaction from the Fed to exceed its own expectations for the overnight rate. Meanwhile, US 10-year treasury yield is almost flat at 1.88 from the late US session.