U.S. yields jump after hot CPI points to bigger rate hikes

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NEW YORK — Treasury yields shot higher

on Thursday after a hotter-than-expected reading of U.S.

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consumer prices in September suggested the Federal Reserve will

need to keep interest rates higher for longer to tame sticky

inflation.

The consumer price index rose 0.4% last month after gaining

0.1% in August, the Labor Department said. Economists polled by

Reuters had forecast the CPI to climb 0.2%.

Core CPI jumped 6.6% on an annual basis, faster than the

6.3% registered in the 12 months through August. Economist had

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expected a 6.5% gain in September.

The yield on two-year Treasury notes, which

typically move in step with interest rate expectations, rose

23.5 basis points to a 15-year high of 4.523%.

The numbers were clearly very bad,” said Andrzej Skiba, head

of the BlueBay U.S. fixed income team at RBC Global Asset

Management. “It highlights this situation where almost every

single time inflation is hotter than expected, forcing the Fed

to move the goal posts again.”

Investors have been trying to gauge when the U.S. central

bank will ease its rapid pace of raising rates, what’s been

dubbed a Fed pivot.

The Fed’s rate-hiking pace has been the most aggressive in

decades and has pushed both bonds and stocks into bear markets.

Rates have risen so fast the 10-year’s yield shot up about 69

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basis points in September, the biggest monthly gain since July

2003.

The Fed’s terminal rate will now likely peak next year at

4.90%, up from previous forecasts of 4.65%, Skiba said.

“We will now be discussing whether the Fed needs to be

tightening even more than previously was priced in to stem

inflation,” he said. “Any hope of a Fed pivot this year is dead

in the water. Now the question is will inflation be able to

cooperate some time in 2023.”

Money markets were pricing in an 88.7% probability that Fed

policymakers would hike rates by 75 basis points when they meet

on Nov. 1-2. An extraordinary 100-basis-point hike was given an

11.3% probability.

The 10-year Treasury yield rose 14 basis points

to 4.042%, while the yield on the 30-year Treasury bond

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was up 8.4 basis points to 3.971%.

The gap between yields on two- and 10-year Treasury notes

, seen as a recession harbinger, widened at -48.3

basis points.

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

Inflation-Protected Securities (TIPS) was last at

2.412%.

The 10-year TIPS breakeven rate was last at

2.328%, indicating the market sees inflation averaging a bit

more than 2.3% a year for the next decade.

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

, seen by some as a better gauge of inflation

expectations due to possible distortions caused by the Fed’s

quantitative easing, was last at 2.385%.

Oct. 13 Thursday 9:33 AM New York / 1333 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 3.6375 3.7219 0.100

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Six-month bills 4.15 4.2973 0.134

Two-year note 99-134/256 4.5057 0.219

Three-year note 99-62/256 4.5233 0.217

Five-year note 99-46/256 4.3101 0.196

Seven-year note 98-12/256 4.2013 0.170

10-year note 89-144/256 4.0464 0.144

20-year bond 87-196/256 4.2975 0.107

30-year bond 83-20/256 3.973 0.086

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 32.75 0.75

U.S. 3-year dollar swap spread 7.50 -1.50

U.S. 5-year dollar swap spread 1.25 -1.50

U.S. 10-year dollar swap spread 1.50 -0.25

U.S. 30-year dollar swap spread -45.25 -0.50

(Reporting by Herbert Lash

Editing by Bernadette Baum)