U.S. yields jump, then ease, as hot CPI data sees big rate hikes

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NEW YORK — Benchmark Treasury yields jumped to 14-year

highs on Thursday after data showing larger than expected gains in U.S. consumer

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prices last month raised fears the Federal Reserve’s ongoing efforts to tame

inflation will spark a recession.

The yield on 10-year Treasury notes, a key benchmark for

mortgages and corporate debt, climbed to 4.08%, the highest since October 2008.

The two-year note’s yield, which reflects interest rate expectations,

hit 15-year highs.

But rates pared gains as short-covering in U.S. equities and the notion

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markets were deeply over-sold reversed the sell-off on Wall Street and led

Treasury prices, which are inverse to their yield, to edge off their lows for

the day.

A Labor Department report showed a measure of underlying inflation

posting its biggest annual increase in 40 years as rents surged by the most

since 1990.

The report reinforced expectations the Fed will deliver a fourth

straight 75-basis-point rate hike next month.

“We’re clearly nowhere near the point where the Fed can consider pausing

or even accommodating at some point,” said Andrzej Skiba, head of the BlueBay

U.S. fixed income team at RBC Global Asset Management.

“That’s a challenge because the economy will be slowing down and we do

believe we’re heading into a U.S. recession,” he said.

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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. Economists had expected a 6.5% gain in

September.

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 basis points in September, the biggest monthly

gain since July 2003.

Fed fund futures will now likely peak next year at 4.90%, up from previous

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forecasts of 4.65%, Skiba 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,” he said.

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.

Ten-year Treasury yields were last up 3.7 basis points to 3.939%, while

two-year notes rose 14.3 basis points to a 15-year high of 4.430%.

The Treasury sold $18 billion of 30-year bonds at a high yield of 3.930%.

The 30-year’s yield was later up 3.3 basis points on the day at

3.920%.

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

as a recession harbinger, widened at -49.3 basis points.

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

Securities (TIPS) was last at 2.431%.

The 10-year TIPS breakeven rate was last at 2.325%, 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 2.350%.

Oct. 13 Thursday 2:22 PM New York / 1822 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 3.61 3.6935 0.072

Six-month bills 4.125 4.2709 0.108

Two-year note 99-171/256 4.4277 0.141

Three-year note 99-136/256 4.4187 0.113

Five-year note 99-184/256 4.188 0.074

Seven-year note 98-192/256 4.0829 0.052

10-year note 90-96/256 3.9394 0.037

20-year bond 88-144/256 4.2326 0.042

30-year bond 83-228/256 3.9204 0.033

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 8.50 -0.50

U.S. 5-year dollar swap spread 1.00 -1.75

U.S. 10-year dollar swap spread -0.25 -2.00

U.S. 30-year dollar swap spread -47.75 -3.00

(Reporting by Herbert Lash

Editing by Bernadette Baum and Nick Zieminski)