NEW YORK (Reuters) -U.S. Treasury yields were mixed on Friday, with some maturities pulling back from highs, as selling eased amid uncertainty surrounding the timing of the Federal Reserve’s first interest rate hike since December 2018 and the number of such increases.
Fed policymakers are also expected to announce plans to begin tapering the central bank’s $120 billion in monthly purchases of Treasuries and mortgage-backed securities at the end of their two-day meeting next week.
The market, though, has been more focused on the tightening that follows the taper.
“Treasuries will be sensitive to any Fed concerns about high inflation readings, which could bring an earlier start to the hiking cycle,” TD Securities wrote in its latest research note.
Friday’s data showing a gain in employment costs and consumer inflation for September fanned worries that the Fed could take aggressive policy action to combat the surge in prices.
The U.S. employment cost index, the broadest measure of labor costs, grew the most since 2001 as companies boosted wages and benefits amid a severe worker shortage. The index surged 1.3% last quarter after rising 0.7% in the April-June period
Consumer price inflation also remained elevated.
The personal consumption expenditures (PCE) price index, excluding food and energy components, climbed 0.2% after gaining 0.3% in August. In the 12 months through September, the so-called core PCE price index increased 3.6%, little changed from August.
Following the data, fed funds futures have fully priced in a quarter-point tightening by July 2022 and another rate increase by December.
Wells Fargo, though, does not agree with the rate futures market, instead calling for the first hike in mid-2023.
Zach Griffiths, macro strategist at Wells Fargo, expects a sharp inflation pullback in 2023 to more typical levels: a range in the high 1%’s or right around 2% in the consumer price index or the core PCE.
“If the Fed sees that as well, we think they could tolerate higher inflation over an extended time frame based on a new framework,” he added.
U.S. yield curves, meanwhile, continued to flatten as investors priced in a Fed hike next year. The spread between U.S. 5-year and 30-year yields narrowed to 72.9 basis points, the tightest since late March 2020. It was last at 75 basis points.
In afternoon U.S. trading, the benchmark U.S. 10-year yield was down 1 basis point at 1.5574%. On the week, the 10-year yield was down 8 basis points, the largest weekly drop since early July.
U.S. 2-year yields backed off Thursday’s 19-month peaks to trade down less than a basis point at 0.4911%. The yield rose 21 basis points this month, its largest monthly gain since April 2018.
The U.S. 5-year yield, another part of the curve that is sensitive to Fed rate expectations, was flat at 1.1896%. It rose 20 basis points this month, the steepest gain since February 2021.
The yield on U.S. 10-year Treasury Inflation Protected Securities (TIPS) also rose in tandem with nominal Treasuries. U.S. real yield hit a more than one-week high of -0.889% and was last at -0.977%. The 10-year annual breakeven rate dropped as a result to 2.536%.
Analysts attributed the surge in real yields to profit-taking ahead of a Fed taper that will likely include reducing purchases of TIPS.
In a sign of market uncertainty, the U.S. 20-year and 30-year yields remained inverted on Friday due to technical factors amid a backdrop of curve flattening around the world..
U.S. 20-year yields were last up 1 basis point at 1.9878%, while those on the 30-year was down 2 basis points at 1.9410%.
October 29 Friday 3:21PM New York / 1921 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.0575 0.0583 0.002
Six-month bills 0.0625 0.0634 0.000
Two-year note 99-202/256 0.4812 -0.020
Three-year note 99-168/256 0.7429 -0.029
Five-year note 99-196/256 1.1734 -0.017
Seven-year note 99-140/256 1.4433 -0.006
10-year note 97-84/256 1.5451 -0.024
20-year bond 96-80/256 1.976 0.000
30-year bond 101-144/256 1.9307 -0.032
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 19.75 3.00
spread
U.S. 3-year dollar swap 21.00 3.50
spread
U.S. 5-year dollar swap 4.50 -0.25
spread
U.S. 10-year dollar swap 0.75 0.00
spread
U.S. 30-year dollar swap -21.75 -0.25
spread
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis)
