U.S. yields rise ahead of CPI data, Fed decision

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NEW YORK — U.S. Treasury yields rose

on Monday ahead of an intense week for bond investors, with the

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release of U.S. inflation data and a policy decision by the

Federal Reserve expected to test a recent rally and set the tone

for markets over the next few months.

The Fed is largely expected to deliver a 50 basis points

interest rate hike on Wednesday, slowing down from four

consecutive 75 basis point increases as it tries to curb

decades-high inflation without causing a recession.

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Before that, investors will focus on the release of the

November Consumer Price Index (CPI) on Tuesday.

“This inflation print is going to be important … everybody

recognizes that the path of inflation is at this point the main

driver,” said Steven Abrahams, senior managing director at

Amherst Pierpont Securities.

Better-than-expected consumer price data in October fueled a

bond rally over the past month, with benchmark 10-year Treasury

yields – which move inversely to prices – down by

nearly 60 basis points from early November until last week.

But some investors in the market fear the rally may be

overdone and that higher-for-longer inflation and interest rates

may push bond yields higher once again.

“The Federal Open Market Committee (FOMC) meeting, combined

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with the release of U.S. inflation data, will test the good

cheer currently prevailing in the bond market,” MSCI said in a

research note.

“The way forward is still uncertain and depends on the

stickiness of inflation, appropriateness of the rate policy to

address it and how much economic damage monetary tightening

could cause,” it said.

Tuesday’s CPI data are expected to show prices rose 7.3% in

November on an annual basis, easing from the 7.7% rise in the

previous month. The core rate, which excludes volatile food and

energy prices, is expected to have moderated to 6.1% from 6.3%

in October.

Fed funds futures traders on Monday were pricing in a 91%

chance of a 50 bps hike on Wednesday and that the Fed will shift

to rate cuts in the second half of next year to boost an economy

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hurt by significantly higher borrowing costs.

“The Fed has constantly had to fight the market’s tendency

to price an easing in the second half of 2023, so there’s some

risk that the Fed again delivers the message that tends to hold

rates at a plateau through 2023. And that could knock yields

higher across the curve,” said Abrahams.

Benchmark 10-year note yields rose about 5 basis

points to 3.614% on Monday.

Not helping matters was a U.S. 10-year note auction which

showed investors demanding a premium to buy the paper. The $32

billion nine-year 11-month notes offering stopped at a high

yield 3.625%, over 3 basis points higher than the expected rate

at the bid deadline.

“It is an indication that the Treasury market rally that

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we’ve seen up until the last week or so is getting a bit tired,”

said Padhraic Garvey, regional head of research for Americas at

ING.

Two-year Treasury yields – which tend to closely

reflect monetary policy expectations – were also higher on

Monday, climbing 7 basis points to 4.404%.

The yield curve comparing two-year yields with 10-year

yields remained deeply inverted, at -78.6 basis

points. An inversion in that part of the curve is seen as a

harbinger of an upcoming recession.

December 12 Monday 3:00PM New York / 2000 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.1875 4.2886 -0.005

Six-month bills 4.6025 4.7745 0.044

Two-year note 100-45/256 4.4047 0.075

Three-year note 100-240/256 4.1549 0.071

Five-year note 100-82/256 3.8033 0.046

Seven-year note 100-216/256 3.7361 0.048

10-year note 104-56/256 3.6149 0.048

20-year bond 102-100/256 3.8272 0.021

30-year bond 107-172/256 3.58 0.030

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 29.00 -2.25

spread

U.S. 3-year dollar swap 10.00 -0.50

spread

U.S. 5-year dollar swap 4.25 0.75

spread

U.S. 10-year dollar swap -2.00 0.00

spread

U.S. 30-year dollar swap -35.50 0.25

spread

(Reporting by Davide Barbuscia; Editing by Susan Fenton and

Nick Zieminski)

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