Long-end yields ease on hopes of UK fiscal policy U-turn
SINGAPORE — Longer-end U.S. Treasury yields dipped on Friday, even in the aftermath of a red-hot inflation print, as investors took heart that a potential revision to the new British government’s spending plans may stem the contagion from a rout in the gilts market.
The yield on 10-year Treasury notes was down 1.6 basis points at 3.938%, while the yield on the 30-year Treasury bond was down 2.4 basis points at 3.910%.
Overnight, British government bond prices rose strongly after reports that Prime Minister Liz Truss’s government was considering a U-turn on some of the measures in its late-September “mini-budget” that triggered a historic gilts slump.
Finance minister Kwasi Kwarteng, who cut short his trip to Washington for this week’s meeting of global finance ministers, also confirmed to reporters that he was flying back to London early, without providing further details.
“There is a lot of media speculation that the UK government would abandon this tax plan, so I think that’s benefitting the gilt market and to an extent that limits the spillover onto U.S. Treasuries,” said Bank of Singapore currency strategist Moh Siong Sim.
Meanwhile, a scorching U.S. inflation print released on Thursday sent the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, to a 15-year high of 4.535% overnight. It was last down 1 basis point at 4.439%.
U.S. consumer prices increased more than expected in September as rents surged by the most since 1990 and the cost of food also rose, reinforcing expectations the Federal Reserve will deliver a fourth straight 75-basis-point interest rate hike next month.
The core CPI jumped 6.6% in the 12 months through September, the most since August 1982, after rising 6.3% in August.
“It proves that inflation is here to stay higher for longer, and no matter what the central banks are doing, it’s still a concern,” said Jerome Broustra, head of investment specialists, fixed income and multi-asset solutions, core investments, at AXA Investment Managers.
“It’s a bit worrying in the sense that it’s a global phenomenon – we see inflation picking up almost everywhere, and we know that at some point, there will be a trade off between this inflation pressure and the growth deterioration.”
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, which is seen as an indicator of economic expectations and has been inverted since July, was a negative 50.3 basis points.
Markets are now pricing in an 86.6% chance of a 75-basis-point rate hike at November’s FOMC meeting, with a 13.4% chance of a 100 bp increase. (Editing by Vidya Ranganathan and Jacqueline Wong)
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