U.S. yields rise as speculation on Fed easing ebbs

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NEW YORK — U.S. Treasury yields rose

on Friday after data showed underlying inflation pressures

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remain elevated, suggesting to the bond market that the Federal

Reserve will move forward with its aggressive interest rate

hiking campaign.

The personal consumption expenditures price index rose 6.2%

in the 12 months through September to match the prior month’s

rise. The core PCE price index, which excludes food and energy,

advanced 5.1% annually after increasing 4.9% in August.

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Market rates had declined over the past week on speculation

the Fed might soon pause its hiking because it could spark a

recession. But with inflation showing few signs of abating, that

view dissipated as the 10-year Treasury yield edged above 4%.

“The market reaction makes sense,” said Priya Misra, head of

global rates strategy at TD Securities. “Inflation will not

allow the Fed to pause anytime soon.”

Steven Ricchiuto, U.S. chief economist at Mizuho Securities

in New York, said he doubted the sell-off in bonds is over as

the Fed is not at the point where the U.S. central bank will

significantly change its target, or terminal, policy rate.

“All the data is telling us that the Fed’s terminal rate is

higher than what the market is currently anticipating,” he said.

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“Whether they go in December from 75 (basis points) to 50

doesn’t necessarily change the terminal rate and that’s the key

issue.”

Fed funds futures are pricing in a 98.4% probability that

the Fed will raise rates by 75 basis points when policymakers

meet Nov. 1-2. In the past week the market has cut expectations

for an almost 5% target rate by March 2023 to 4.85% by May 2023.

The bond market’s view on rates differs from the equity

market’s, where investors hope the Fed pauses its rate hikes.

“The equity market wants one thing and the bond market is

thinking another, and at some point the train will meet but not

particularly right now,” Ricchiuto said.

With few signs of inflation abating, the yield spread on

three-month bills and 10-year notes remained

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negative at -8.3 basis points. The spread this week turned

negative, indicating a recession lies ahead.

The yield on 10-year notes rose 6.9 basis points

to 4.008%, while the 30-year yield was up 3.9 basis

points to 4.133%.

The two-year yield, which typically moves in step

with interest rate expectations, was up 8.5 basis points at

4.406%.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.643%.

The 10-year TIPS breakeven rate was last at

2.504%, indicating the market sees inflation averaging about

2.5% a year for the next decade.

The U.S. dollar 5 years forward inflation-linked swap

, seen by some as a better gauge of inflation

expectations due to possible distortions caused by the Fed’s

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quantitative easing, was last at 2.590%.

Oct. 28 Friday 2:23 PM New York / 1823 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 3.99 4.0848 0.038

Six-month bills 4.3525 4.51 0.062

Two-year note 99-241/256 4.4059 0.085

Three-year note 99-168/256 4.3745 0.091

Five-year note 99-192/256 4.1809 0.091

Seven-year note 99-96/256 4.1036 0.098

10-year note 89-228/256 4.0081 0.069

20-year bond 86-168/256 4.3907 0.063

30-year bond 80-176/256 4.1329 0.039

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 37.50 2.75

U.S. 3-year dollar swap spread 14.75 2.75

U.S. 5-year dollar swap spread 6.75 2.75

U.S. 10-year dollar swap spread 3.50 3.25

U.S. 30-year dollar swap spread -46.25 3.00

(Reporting by Herbert Lash in New York

Editing by William Maclean and Matthew Lewis)