Yields jump on Fed expectations, corp debt supply

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NEW YORK — Benchmark U.S. Treasury yields

rose on Tuesday to their highest levels since June on

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expectations that the Federal Reserve will keep hiking interest

rates to battle soaring prices and as a slew of corporate debt

supply weighed on the market.

The Fed is expected to raise the fed funds rate by another

75 basis points at its Sept. 20-21 meeting, which would bring

the range to between 3.0% and 3.25%. That is up from the zero to

0.25% band in March.

Concerns that inflation will remain persistently high if

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energy prices rise heading into winter is adding to pressure on

government bonds. Russia has kept one of its main gas supply

routes to Europe shut, stoking fears of winter fuel shortages.

“You have all this fear that more rate increases are going

to happen at the central bank level, inflation is not going to

dissipate and then you’ve got the quantitative tightening that’s

coming pretty rapidly,” said Tom di Galoma, managing director at

Seaport Global Holdings in New York.

Beginning this month, the Fed will allow $95 billion in

bonds to roll off its balance sheet each month, including $60

billion in Treasuries and $35 billion in mortgage-backed debt.

Treasuries yields also rose on Tuesday as a slew of

companies sold corporate bonds.

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“That’s putting pressure on the market,” di Galoma said.

The sharpest sell-off in British government bonds since

March 2020 added to U.S. debt weakness. This came on concerns

about the costs of new Prime Minister Liz Truss’ reported plans

to freeze household energy bills at broadly their current level.

Benchmark 10-year note yields were last 3.336%,

the highest since June 16. They have risen from a four-month low

of 2.516% on Aug. 2, but are holding below the 11-year high of

3.498% reached on June 14.

Interest-rate-sensitive two-year yields were last

3.497%, after hitting 3.551% on Thursday, the highest since

November 2007.

The yield curve between two- and 10-year notes

remained inverted at minus 16 basis points, an

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indicator that a recession is likely in the next one to two

years. The inversion is less severe, however, than the minus 56

basis points level reached on Aug. 10.

Thirty-year bond yields reached as high as

3.487%, just below an eight-year high of 3.494% reached on June

16.

Data on Tuesday showed the U.S. services industry picked up

again in August for the second straight month amid stronger

order growth and employment, while supply bottlenecks and price

pressures eased.

The next major U.S. economic release will be consumer price

inflation data for August, which is due on Sept. 13.

September 6 Tuesday 3:01PM New York / 1901 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 2.8725 2.9323 0.023

Six-month bills 3.2925 3.3928 0.042

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Two-year note 99-136/256 3.4967 0.099

Three-year note 98-200/256 3.5651 0.134

Five-year note 98-146/256 3.4397 0.146

Seven-year note 98-48/256 3.419 0.142

10-year note 95-20/256 3.3358 0.145

20-year bond 94-208/256 3.7465 0.132

30-year bond 91-24/256 3.4813 0.137

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 36.75 0.75

spread

U.S. 3-year dollar swap 12.25 -1.75

spread

U.S. 5-year dollar swap 6.25 -1.00

spread

U.S. 10-year dollar swap 7.75 -1.50

spread

U.S. 30-year dollar swap -32.50 -3.00

spread

(Reporting by Karen Brettell; editing by Jonathan Oatis and

Richard Chang)