Futures traders see a 30 percent probability that Federal Reserve officials will boost rates when they meet next month.

(Bloomberg) — Treasuries fell, heading for their biggest weekly drop since November, as Federal Reserve officials indicated they’re considering a June interest-rate increase should economic data remain steady.

Futures traders see a 30 percent probability that policy makers will boost rates when they meet next month, up from a 4 percent chance seen on Monday. A measure of volatility in the $13.4 trillion Treasury market rose Thursday to the highest level in more than a month.

Investors were caught off guard by the hawkish tone of Fed communications, lulled into complacency amid signs of sluggish global economic growth. Minutes from the Fed’s April meeting released May 18 indicated June is still in play, while Fed Bank of New York President William Dudley said Thursday the central bank is moving closer to raising rates at one of its next two meetings.

“The market had very little priced in for the potential for the Fed to tighten in June or July,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The market is trying to price in some more,” he said, adding that the two-year yield could reach one percent within the next month, a level it last touched in January.

Volatility climbs

Yields on two-year notes, the securities most sensitive to Fed policy expectations, rose one basis point, or 0.01 percentage point, to 0.89 percent as of 11:17 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security maturing in April 2018 was at 99 23/32. The yield has risen 14 basis points this week, the biggest climb since the week ended Nov. 6.

The 10-year note yield rose one basis point to 1.85 percent and has surged 15 basis points this week, also the most since November.

Derivatives traders are pricing in a 51 percent probability that the Fed raises rates at or before its July meeting, rising to a 76 percent chance of a move by year-end. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase.

Merrill Lynch & Co.’s MOVE index, a volatility gauge measuring swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, climbed to 71 on Thursday, the highest since April 8. More muted price swings depress a dealer’s capacity to profit from trades.

 

See also:

Treasuries traders bet Fed minutes will keep the rate door open

Fed minutes likely to reveal debate on June, July rate hike

Yellen’s scope for summer rate hike widens as ECB signals hold

Yield grab pushes U.S. Treasuries curve to flattest since 2007

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