TREASURIES-Inflation worry sends two-year yields to more than 18-month high; auctions eyed

BY Reuters | TREASURY | 10/12/21 10:22 AM EDT
    (Updates throughout, changes byline, dateline; previous
Singapore)
    By Chuck Mikolajczak
    NEW YORK, Oct 12 (Reuters) - Yields on the U.S. two-year
Treasury note jumped to their highest level in more than 18
months on Tuesday, as climbing oil prices added to the
inflationary picture and heightened expectations that the
U.S. Federal Reserve may be forced to take action earlier
than currently anticipated.
    The yield on the 2-year was up 1.8 basis
points to 0.336% after reaching as high as 0.356%, its
highest level since March 25, 2020.
    Brent crude prices have climbed for more than
five straight weeks, hitting a two-year high of $84.60 on
Monday, as climbing demand and clogs in the supply chain have
contributed to rising prices in other commodities as well.

    The yield on the two-year eased somewhat as crude prices
oscillated around the unchanged mark.
    "Since we have had consecutive days of energy costs going
higher the market feels as if the Fed's hands might be
getting a little more tied," said Jim Barnes, director of
fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
    "The transitory theme is still there; it is just that
before transitory was tied more to bottlenecks and supply
issues, and now on top of that you could throw in commodity
costs going higher ... the market is kind of throwing up
their hands a little bit and saying there is inflationary
pressures coming from different angles, which could make
things problematic for the Fed."
    Federal Reserve Vice Chair Richard Clarida will speak on
the U.S. economic outlook and monetary policy at 11:15 a.m.
EDT (1515 GMT) and Federal Reserve Bank of Atlanta President
Raphael Bostic speaks on inflation at 12:30 p.m. EDT (1630
GMT).
    The yield on 10-year Treasury notes was down
1.8 basis points to 1.587%.
    Investors will closely monitor Wednesday's consumer price
index data for September, with expectations calling for a
monthly rise of 0.3%.
    The U.S. Treasury will auction $58 billion of three-year
notes at 11 a.m. EDT (1500 GMT) and $38 billion of 10-year
notes at 1 p.m. EDT (1700 GMT) on Tuesday. An auction of $24
billion of 30-year bonds is scheduled on Wednesday.
    The yield on the 30-year Treasury bond was
down 4.4 basis points to 2.116%.
    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 125.0 basis points after hitting a
3-1/2-month high of 129.7 on Friday.

      October 12 Tuesday 10:14AM New York / 1414 GMT
                               Price
 US T BONDS DEC1               158-12/32    0-29/32
 10YR TNotes DEC1              131-44/256   0-84/256
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.05         0.0507    0.000
 Six-month bills               0.0575       0.0583    -0.003
 Two-year note                 99-213/256   0.3359    0.018
 Three-year note               99-92/256    0.5964    0.016
 Five-year note                99-24/256    1.0629    0.015
 Seven-year note               99-28/256    1.3846    -0.002
 10-year note                  96-240/256   1.5874    -0.018
 30-year bond                  97-112/256   2.1162    -0.044

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        11.75         0.75
 spread
 U.S. 3-year dollar swap        15.25         1.00
 spread
 U.S. 5-year dollar swap         8.25        -0.25
 spread
 U.S. 10-year dollar swap        2.00         0.00
 spread
 U.S. 30-year dollar swap      -24.00         1.00
 spread

 (Reporting by Chuck Mikolajczak; editing by Jonathan Oatis)

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.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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