U.S. 10-year note flirts with 3% yield after German inflation scare


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NEW YORK — U.S. Treasury yields rose on

Friday with the benchmark 10-year note nearly hitting 3% after

Germany reported record-high increases in monthly producer

prices, which are seen as a leading indicator for inflation.

Producer prices in July in Germany – the euro zone’s leading

economy – leapt 37.2% from the same time last year and 5.3% from

June, mainly because of rising energy costs.

German bond yields surged, with the 10-year yield

hitting a four-week high, as the data was seen as

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reinforcing fears of “stagflation” – a combination of high

inflation and low growth.

“The epicenter of the backup in bond yields is coming from

Europe,” said Matthew Miskin, co-chief investment strategist at

John Hancock Investment Management. “The German PPI (Producer

Price Index) is causing European yields to rise, and that’s

rippling across global bond yields.”

The U.S. benchmark 10-year Treasury yield, an

important barometer for mortgage rates and other financial

instruments, rose about 10 basis points from its close on

Thursday to a month high of 2.988%. It hit an intraday high of

about 2.998%, just shy of the 3% threshold it crossed in May for

the first time since 2018 as investors worried about the U.S.

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Federal Reserve’s plan to tighten monetary conditions.

The five-year note yield climbed to 3.114%, a new

one-month high, while the two-year climbed to 3.265%,

faring better than longer-dated bonds.

The rising pressure in yields offset a rally on Thursday,

which was partly due to investors getting some relief from the

minutes of the Fed’s July 26-27 policy meeting. The minutes,

which were released on Wednesday, were seen by many as

confirming a less aggressive stance in the U.S. central bank’s

fight against inflation.

A string of Fed officials on Thursday said the central bank

needs to keep raising borrowing costs to bring high inflation

under control, even as they debated how fast and how high to

lift them.

The comments, however, were no smoking gun for Treasury

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yields, with investors now likely to be looking for direction

from Fed Chair Jerome Powell when he addresses the annual global

central banking conference in Jackson Hole, Wyoming, on Aug. 26.

The Fed has raised its benchmark overnight interest rate by

225 basis points since March and is expected to raise its policy

rate by another 50 or 75 basis points at its next meeting on

Sept. 20-21 as it seeks to counter four decade-high inflation.

The rapid tightening of financial conditions, however, has

led investors to weigh inflation concerns against recessionary

fears, with markets fluctuating between the two.

Richmond Federal Reserve President Thomas Barkin said on

Friday the Fed’s efforts to control inflation could lead to a

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recession, but that it needn’t be a “calamitous” decline in

economic activity.

The closely watched yield curve between two- and 10-year

notes, which has been inverted since early July,

was at minus 27.8 basis points on Friday, its smallest inversion

since Aug. 1. It reached minus 56 basis points on Wednesday last

week, the deepest inversion since 2000.

An inversion in this part of the yield curve is viewed as a

reliable indicator that a recession will follow in 12 to 18

months.

August 19 Friday 3:00PM New York / 1900 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 2.6325 2.6861 0.017

Six-month bills 3.0275 3.1162 0.023

Two-year note 99-129/256 3.2653 0.030

Three-year note 99-136/256 3.2912 0.044

Five-year note 98-88/256 3.114 0.083

Seven-year note 97-58/256 3.0716 0.100

10-year note 97-244/256 2.9887 0.109

20-year bond 98-208/256 3.4578 0.095

30-year bond 95-176/256 3.2255 0.085

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 34.50 -0.25

spread

U.S. 3-year dollar swap 11.75 0.00

spread

U.S. 5-year dollar swap 3.00 0.00

spread

U.S. 10-year dollar swap 5.00 0.50

spread

U.S. 30-year dollar swap -32.25 0.25

spread

(Reporting by Davide Barbuscia; Editing by Paul Simao and

Jonathan Oatis)

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