Treasuries-US yields, rate hike bets rise after Warsh comments

U.S. Treasury yields rose after Federal Reserve Chairman Kevin Warsh said the central bank would "have work to do" if policymakers were not confident inflation was returning to its 2% target, fuelling bets on a September interest rate hike.

The comments, made at the Fed’s annual Jackson Hole symposium, acknowledged that financial conditions do not appear restrictive and were Warsh's clearest indication yet that further rate hikes may be needed to curb inflation.

“Markets took it a bit hawkishly. We saw the market price in more hikes,” said Molly Brooks, a U.S. rates strategist at TD Securities.

Fed funds futures traders are now pricing in 57% odds of a hike at the Fed's September 15 to 16 meeting, up from 35% before Warsh's comments.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 7.42 basis points to 4.304%, the highest since July 31.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.81 basis points to 4.692%.

The yield curve between 2- and 10-year notes US2US10=TWEB reached 37 basis points, the flattest level since July 29.

A September interest rate hike may now depend on jobs and consumer price inflation data for August, which are both due before the Fed meeting.

“It puts the emphasis on the data that's coming up now, so if we get a stable or stronger labor market signal next week and then we get a stronger inflation print the following, then that's going to give a signal that maybe Warsh is ready to go as well,” Brooks said.

Separately, data on Friday showed that the U.S. economy likely created 79,000 fewer jobs in the 12 months through March than previously estimated.