TREASURIES-Treasury yields jump as central banks turn hawkish

BY Reuters | ECONOMIC | 09/23/21 12:10 PM EDT
    (Adds comment on jump in U.S. yields)
    By Herbert Lash
    NEW YORK, Sept 23 - U.S. Treasury yields jumped on Thursday after the
Federal Reserve opened the door to raising interest rates by as early as next
year, a potentially hawkish move that was reinforced by the Bank of England's
outlook on rates and a rate hike by the Norwegian central bank.
    Yields on the benchmark 10-year Treasury note rose above 1.4% to
their highest since mid-July as selling pressure on UK gilts spilled into the
Treasury market after the message from European central banks.
    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
    European Central Bank policymakers, meanwhile, are bracing for inflation to
exceed the bank's already-raised estimates, paving the way to end its emergency
bond purchases in March, sources involved in the discussion said.
    "Accounts are looking at this move in UK gilts, which is causing a lot of
the selling in Europe," said Tom di Galoma, managing director of Seaport Global
Holdings. "Accounts are sensing that rates are going to head higher in the fall,
and they're trying to get in front of it."
    The yield on benchmark 10-year U.S. Treasury notes rose 6.8
basis points to 1.399%, 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,
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
 on Wednesday 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 114.3 basis points.
    The two-year U.S. Treasury yield, which typically moves in step
with interest rate expectations, was up 1.5 basis points at 0.255%.
    The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities
(TIPS) was last at 2.477%.
    The 10-year TIPS breakeven rate was last at 2.325%, indicating
the market sees inflation averaging about 2.33% a year for the next decade.
    The Treasury will auction $14 billion in 10-year TIPS at 1 p.m. (1700 GMT)

    September 23 Thursday 11:49AM New York / 1549 GMT
                               Price                                                             Current   Net
                                                                                                 Yield %   Change
 Three-month bills             0.035                                                             0.0355    0.006
 Six-month bills               0.0475                                                            0.0482    0.002
 Two-year note                 99-192/256                                                        0.2547    0.015
 Three-year note               99-148/256                                                        0.5181    0.024
 Five-year note                99-48/256                                                         0.9188    0.052
 Seven-year note               99-116/256                                                        1.2074    0.062
 10-year note                  98-160/256                                                        1.3993    0.068
 20-year bond                  98-16/256                                                         1.867     0.071
 30-year bond                  101-216/256                                                       1.9186    0.071

                               Last (bps)                                                        Net
 U.S. 2-year dollar swap        11.50                                                              0.25
 U.S. 3-year dollar swap        12.75                                                              0.50
 U.S. 5-year dollar swap        10.00                                                             -0.25
 U.S. 10-year dollar swap        2.50                                                              0.25
 U.S. 30-year dollar swap      -24.75                                                              0.50

 (Reporting by Herbert Lash in New York
Editing by Will Dunham and Matthew Lewis)

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