U.S. Treasury debt prices slipped on Friday, dropping for the eighth straight day on expectations the Federal Reserve will raise interest rates next week and perhaps again in August.
Traders are convinced the Fed will raise rates by 0.25 percentage point at a two-day meeting ending on Thursday, with some speculation that the Fed could even go as far as to raise rates by 50 basis points.
People are starting to realize there is indeed a certain probability the Fed may need to raise more than 25 basis points, said Frank Hsu, managing director of global fixed income at Fimat USA in New York.
People are more and more convinced the Fed has further to go, and that is why the (bond) market has sold off, Hsu said.
Midafternoon in New York, the benchmark 10-year note was trading 5/32 lower in price for a yield of 5.24 percent, up from 5.21 percent late on Thursday and the highest since spring 2002.
Meanwhile, the two-year note, which is more sensitive to changes in official interest rates, was trading 1/32 lower in price for a yield of 5.27 percent, the highest since late in 2000, up from 5.24 percent on Thursday.
The Treasury market was not helped on Friday by weaker European debt prices. Bund futures dipped after European Central Bank Governing Council Member Axel Weber said upward risks to price stability were increasing.
Treasuries are selling, reacting to the move down in the bund market, reacting to hawkish comment by the ECB's Weber, said Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, New Jersey.
However, traders said the bigger picture impacting U.S. Treasuries was still one of expectations of rising interest rates.
The Fed has boosted official interest rates by 0.25 percentage point at each of 16 consecutive policy meetings since June 2004, taking the target for the benchmark overnight lending rate to its current level of 5 percent.
With recent tough talk on price inflation from the Fed, the majority of traders are now looking for an interest rate hike at the Fed meeting in August, in addition to a move in June.
The five-year Treasury note was down 2/32 for a yield of 5.21 percent from 5.20 percent late on Thursday, while the 30-year bond was down 5/32 for a yield of 5.26 percent. Bond prices move inversely to their yields.
Early in the day, data showed new orders for U.S.-made durable goods unexpectedly fell 0.3 percent in May as aircraft orders dived, although business spending remained at healthy levels.
Excluding transportation orders, the Commerce Department said durable goods orders - items meant to last three years or more - rose 0.7 percent, slightly more than economists' consensus forecast. For details see.
Before the Fed's interest rate decision on Thursday next week, the bond market will pay some attention to housing and consumer sentiment data, said Scott Brown, chief economist with Raymond James & Associates in St Petersburg, Fla.
Economic indicators may come in a bit mixed. We may see a bit of a rebound in consumer confidence, and sentiment may rebound, largely attributable to a decline in gasoline prices, Brown said.
Home sales figures are likely to be a bit soft, but a lot of that is already priced in to the market's outlook, he added.