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Expect higher rates soon: Portfolio manager

Two-year Treasury notes sold at the highest yield since December at a Tuesday auction, and the comments of Fed Chair Janet Yellen are likely the reason why.

Short-term Treasury yields have risen dramatically since Yellen signaled that the central bank is on track to raise rates this year. And according to one trader, even higher rates could be ahead this summer.

In a speech in Providence, Rhode Island, on Friday, the Fed chief said that if the economy continues to improve, boosting the fed funds target rate would "be appropriate."

However, Yellen hedged a little by saying, "To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term."

That was enough to send the yield on the U.S. Treasury's two-year note above 0.6 percent. It rose as high as 0.64 percent Tuesday morning before retreating.

Federal Reserve Board Chairwoman Janet Yellen speaks about global finance during a conference May 6, 2015 in Washington, DC.
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Federal Reserve Board Chairwoman Janet Yellen speaks about global finance during a conference May 6, 2015 in Washington, DC.

What is surprising to traders was the additional details Yellen gave in her speech. "She was a little bit more specific in terms of commenting on some areas of the economy she was expecting to improve," said Andrew Burkly, portfolio manager at Oppenheimer.

"She noted housing and mortgage activity is likely to pick up. She talked about municipal spending she thinks is going to be a little bit better and help out the economy. And probably the big one is she is noting how global growth is likely to start to rebound."

The global economy's sluggishness helped pave the way for astounding lows in many rates, including the German bund. However, in the past several weeks the benchmark German 10-year bund yield has bounced from close to zero to 0.5 percent. Burkly expects that to boost U.S. yields also.

"We've seen U.S. rates start to come back as well," he said. "The overall picture continues to suggest higher rates and now that's what we're seeing with the yield curve continuing to widen out a bit globally."

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