TREASURIES-Treasury yields edge higher after Europe foresees rate hikes

BY Reuters | ECONOMIC | 09/23/21 10:28 AM EDT
    By Herbert Lash
    NEW YORK, Sept 23 - U.S. Treasury yields rose on Thursday after the Federal Reserve opened the door to raising
interest rates by as early as next year, a potential move that was reinforced by the Bank of England's outlook on
rates and a rate hike by the Norwegian central bank.
    The BofE said on Thursday the case for higher rates "appeared to have strengthened," leading interest rate
futures to price in a 90% chance that the British central bank would raise rates by February.
    Norges Bank raised its benchmark interest rate to 0.25% from zero and expects to hike again in December,
saying a strong recovery in the Norwegian economy made it time to start a gradual normalization of monetary
policies. It became the first major central bank to tighten policy since the COVID-19 crisis began.
    European Central Bank policymakers, meanwhile, are bracing for inflation to exceed the bank's already raised
estimates, paving the way to end to its emergency bond purchases in March, sources involved in the discussion
    The yield on benchmark 10-year U.S. Treasury notes rose  3.1 basis points to 1.362%, but three-
and five-year notes rose more quickly as the market repriced the middle part of the curve.
    The five-year note rose above 90 basis points for the first time since early July after the Fed said on
Wednesday it would reduce its monthly bond purchases "soon" and half of the central bank's policymakers projected
borrowing costs will need to rise in 2022, a more hawkish tilt than in the past.
    The target on five-year notes is now around 1% and there will probably be more repricing as the market
assesses Fed Chair Jerome Powell's hawkish stance, said Tom di Galoma, managing director of Seaport Global
    "I don't think I've ever seen (Powell) be as emphatic about doing certain things than he was yesterday," di
Galoma said. "The central banks are starting to finally get the message that they actually need to tighten. The
pandemic's basically over," he said.
    After the statement from the Federal Open Market Committee (FOMC), the Fed funds market fully priced in a rate
hike by January 2023, moving projected rate hikes forward by a month.
    A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year
Treasury notes, seen as an indicator of economic expectations, was at 111.1 basis points.
    The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations,
was up 0.9 basis points at 0.249%.
    The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at
    The 10-year TIPS breakeven rate was last at 2.292%, indicating the market sees inflation
averaging about 2.3% a year for the next decade.
    The Treasury will auction $14 billion in 10-year TIPS, along with $10 billion of four-week and $25 billion in
eight-week bills at 1 p.m. (1700 GMT)

    September 23 Thursday 10:04 AM New York / 1404 GMT
                               Price                                                             Current   Net
                                                                                                 Yield %   Change
 Three-month bills             0.0325                                                            0.033     0.003
 Six-month bills               0.0475                                                            0.0482    0.002
 Two-year note                 99-195/256                                                        0.2486    0.009
 Three-year note               99-156/256                                                        0.5074    0.013
 Five-year note                99-70/256                                                         0.9009    0.034
 Seven-year note               99-166/256                                                        1.1779    0.033
 10-year note                  98-248/256                                                        1.3617    0.031
 20-year bond                  98-228/256                                                        1.8167    0.021
 30-year bond                  102-236/256                                                       1.8719    0.024

                               Last (bps)                                                        Net
 U.S. 2-year dollar swap        11.75                                                              0.50
 U.S. 3-year dollar swap        13.25                                                              1.00
 U.S. 5-year dollar swap        10.50                                                              0.25
 U.S. 10-year dollar swap        3.00                                                              0.75
 U.S. 30-year dollar swap      -23.75                                                              1.50

 (Reporting by Herbert Lash; Editing by Will Dunham)

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