TREASURIES-Two-year yields hit more than 18-month high with inflation data on deck

BY Reuters | ECONOMIC | 10/12/21 02:59 PM EDT
    (Adds auction results; Clarida, Bostic comments)
    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, on concerns rising inflation may force the
U.S. Federal Reserve to take action earlier than currently
anticipated with a key report on consumer prices on Wednesday
in focus.
    The yield on the 2-year was up 3.2 basis
points to 0.350% after reaching as high as 0.36%, 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 increasing demand and clogs in the supply chain
have also contributed to rising prices in other commodities.

    Investors will closely monitor Wednesday's consumer price
index (CPI) data for September, with expectations calling for
a monthly rise of 0.3%.
    A $58 billion Treasury auction of three-year notes
 was generally regarded as soft by analysts, while
an auction of $38 billion in 10-year notes was seen as well
received.
    Atlanta Fed Bank President Raphael Bostic said on Tuesday
that U.S. inflation is above the Federal Reserve's 2%
inflation target and policymakers need to watch carefully to
ensure that pandemic-induced pressures do not cause long-term
inflation expectations to become unanchored, while Fed Vice
Chair Richard Clarida said the central bank has all but met
its employment goal to move ahead with trimming its bond
buying program.
    While shorter-term yields climbed, yields on longer-dated
Treasuries dipped and served to flatten the curve.
    "The big move in Treasuries today has been the flattening
and it is just a little bit of nervousness about where that
CPI number is going to come in tomorrow," said Don
Ellenberger, senior portfolio manager at Federated Hermes.
    "If it comes in high then maybe the Fed is going to have
to do what Bostic has been saying, they are going to have to
hike rates a little bit faster, a little bit sooner than the
market anticipates."
    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 123.0 basis points after hitting a
3-1/2-month high of 129.7 on Friday.
    The yield on 10-year Treasury notes was down
2.1 basis points to 1.584%.
    The yield on the 30-year Treasury bond was
down 5.2 basis points to 2.108%.

      October 12 Tuesday 2:44PM New York / 1844 GMT
                               Price
 US T BONDS DEC1               158-17/32    1-2/32
 10YR TNotes DEC1              131-28/256   0-68/256
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.05         0.0507    0.000
 Six-month bills               0.055        0.0558    -0.005
 Two-year note                 99-206/256   0.3499    0.032
 Three-year note               99-78/256    0.6154    0.035
 Five-year note                99-8/256     1.0759    0.028
 Seven-year note               99-16/256    1.3917    0.005
 10-year note                  96-248/256   1.5838    -0.021
 30-year bond                  97-160/256   2.1076    -0.052

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        12.00         1.00
 spread
 U.S. 3-year dollar swap        15.25         1.00
 spread
 U.S. 5-year dollar swap         8.00        -0.50
 spread
 U.S. 10-year dollar swap        1.75        -0.25
 spread
 U.S. 30-year dollar swap      -23.75         1.25
 spread

 (Reporting by Chuck Mikolajczak; editing by Jonathan Oatis
and Nick Zieminski)

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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