TREASURIES-Two-year yields hit 18-month high as energy costs stoke inflation worries

BY Reuters | ECONOMIC | 10/11/21 11:33 PM EDT

SINGAPORE, Oct 12 (Reuters) - Two-year Treasury yields leapt to a more than 18-month high on Tuesday as investors sold U.S. debt, reckoning that surging energy prices would fuel inflation and add to pressure on the Federal Reserve to raise interest rates.

Prices for gas, coal, oil and other commodities have soared in recent weeks, and there is growing evidence that costs are flowing through supply chains.

At the resumption of trade in Asia, after Monday's Columbus Day holiday in the United States, two year yields rose 3.6 basis points to 0.3560%, before easing a little bit to 0.3497%.

That extended the sell-off in two-year Treasuries to a sixth consecutive session. The yield was at its highest since late March 2020, when investors sold debt in the days after the Fed dropped its benchmark rate to near zero.

"It's part of a phenomenon we're seeing globally with worries about inflation spiking further on the back of higher energy prices," said Shane Oliver, chief economist at AMP Capital in Sydney.

"There's expectation that maybe that will bring forward Fed tightening," he said, though adding that he personally does not think the Fed will be in any hurry to hike.

Five-year yields rose nearly 4 bps to 1.095% in Asia, their highest since late February 2020 and benchmark 10-year yields touched a four-month high of 1.6310%.

The 10-year yield has now climbed about 30 basis points in three weeks, with even softer-than-expected U.S. labour data last week insufficient to staunch the sell off or shake markets' belief that the Fed is on course to begin rate rises next year.

Bonds are also under pressure globally with 10-year bund yields up 20 bps in three weeks, 10-year Australian government bond yields up almost 50 bps over the same period and even anchored 10-year Japanese yields rising 5.5 bps. (Reporting by Tom Westbrook; Editing by Simon Cameron-Moore)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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