U.S. Treasury notes fell, pushing yields to the highest since February, as traders speculated the Federal Reserve will stop cutting interest rates after this month.
Fear is receding. People are looking at where fed funds is going to be, maybe settling in at 2 percent, and saying do we really want to own two-year notes at 1.5 percent if things are settling, if there's less risk to the system. Traders added to bets the Fed will cut its target rate by just a quarter-point to 2 percent on April 30. Futures on the Chicago Board of Trade show a 76 percent chance of that size reduction, up from 58 percent a week ago. The rest of the bets are on a half-point cut. Traders now see a better-than-even chance the rate will stay at 2 percent through next quarter.
Swap spreads widened amid the increase in Libor rates, which typically signals a decline in risk appetite. The spread between Treasury yields and the rate on a two-year interest-rate swap, used to hedge against interest-rate swings, reached as wide as 101.88 basis points, from 96.25 yesterday. Rising swap rates can lead investors who are receiving fixed payments to sell Treasuries to hedge the risk that rates will rise.
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