U.S. yields climb as strong data supports more Fed rate hikes

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NEW YORK — U.S. Treasury yields rose on

Monday as strong data on the services and manufacturing sectors,

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coming on the heels of a solid non-farm payrolls report,

reinforced expectations the Federal Reserve will continue to

raise interest rates well into 2023.

The U.S. two-year/10-year yield curve

deepened its inversion from last Friday. The gap between the two

notes’ yields widened to as much as -81.20 basis points (bps),

the most in two weeks, and was last at -78.5 bps.

The inversion of this curve typically precedes recession.

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U.S. yields extended gains after Monday’s slew of data

showed continued expansion in the world’s largest economy.

U.S. services industry activity unexpectedly picked up in

November, with employment rebounding. The Institute for Supply

Management (ISM) said on Monday its non-manufacturing PMI

increased to 56.5 last month from 54.4 in October, which was the

lowest reading since May 2020.

U.S. factory activity also showed a 1% gain for October, as

did orders for durable goods.

“I think the Fed has more wood to chop here,” said Gregory

Faranello, head of U.S. rates at AmeriVet Securities in New

York.

“The Fed took a sledgehammer to the market all year, but

(Fed Chair Jerome) Powell said we’re going to slow things down a

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little bit which makes sense and see how the economy evolves.

But ISM services were well north of 50 so there is definitely

conflicting data here,” he added, saying that, in contrast,

inflation has been on a downtrend of late.

U.S. yields initially jumped on Friday after nonfarm

payrolls increased by 263,000 jobs last month, which was higher

than expected, with the data for October also revised higher.

“The market is accepting that inflation is cooling and

that’s good news,” said Stan Shipley, fixed income strategist,

at Evercore ISI in New York.

“The problem is they’re also looking at the labor market,

(showing) a solid reading for the month of November, which means

the Fed is going to go more because it wants the labor market to

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slow which raises the risk of recession,” he added.

The rate futures market on Monday had priced in a peak fed

funds rate of 4.95%, seen hitting at the July meeting. That was

down from about 5.1% before Fed Chair Powell said last week that

the U.S. central bank will likely slow the pace of interest rate

hikes as soon as this month.

In afternoon trading, the yield on 10-year Treasury notes

was up 9.6 bps at 3.599%, posting its largest daily

gain in roughly two weeks.

The yield on the 30-year Treasury bond was up

5.8 bps at 3.618%.

On the shorter-end of the curve, the two-year

U.S. Treasury yield, which typically moves in step with interest

rate expectations, was up 10.9 bps at 4.390%. The two-year’s

yield rise was the largest daily gain since Nov. 18.

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December 5 Monday 2:58 PM New York/1958 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.2075 4.3093 -0.011

Six-month bills 4.5475 4.7161 0.034

Two-year note 100-54/256 4.3874 0.107

Three-year note 101-8/256 4.1233 0.132

Five-year note 100-96/256 3.7916 0.126

Seven-year note 100-248/256 3.7161 0.111

10-year note 104-96/256 3.5974 0.094

20-year bond 102-76/256 3.834 0.050

30-year bond 106-248/256 3.6169 0.057

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 30.75 0.25

spread

U.S. 3-year dollar swap 10.25 -1.00

spread

U.S. 5-year dollar swap 2.00 -0.25

spread

U.S. 10-year dollar swap -3.75 0.75

spread

U.S. 30-year dollar swap -39.50 1.00

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Kirsten

Donovan and Angus MacSwan)