U.S. yields rise ahead of CPI data, Fed decision
NEW YORK — U.S. Treasury yields rose
on Monday ahead of an intense week for bond investors, with the
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.
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
with the release of U.S. inflation data, will test the good
cheer currently prevailing in the bond market,” MSCI said in a
“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%
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
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
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
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
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
U.S. 2-year dollar swap 29.00 -2.25
U.S. 3-year dollar swap 10.00 -0.50
U.S. 5-year dollar swap 4.25 0.75
U.S. 10-year dollar swap -2.00 0.00
U.S. 30-year dollar swap -35.50 0.25
(Reporting by Davide Barbuscia; Editing by Susan Fenton and
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