TREASURIES-Short-term yields climb, curve flattens after inflation data

BY Reuters | TREASURY | 10/13/21 02:45 PM EDT
    (Adds Fed minutes, auction results)
    By Chuck Mikolajczak
    NEW YORK, Oct 13 (Reuters) - Yields on shorter-term U.S. Treasuries rose on Wednesday, while
longer-dated yields dipped following data on consumer prices that further fanned concerns
inflation will continue to climb and force the Federal Reserve to take action.
    The consumer price index (CPI) rose 0.4% last month after climbing 0.3% in August, the Labor
Department said on Wednesday. In the 12 months through September, the CPI increased 5.4% after
advancing 5.3% year-on-year in August. Prices are expected to rise further due to supply chain
bottlenecks and a recent surge in the prices of commodities such as oil.
    The yield on the two-year Treasury note, which typically moves in step with
interest rate expectations, was up 1.6 basis points to 0.364% after reaching a high of 0.394%,
its highest since March 24, 2020.
    The three-year note yield was up 1.6 basis points to 0.657% after climbing to
0.701%, its highest since March 5, 2020.
    But longer-dated yields fell, indicating the market is still not pricing in a sustained
period of inflation, which served to flatten the yield curve.
    "The curve flattening is the market suggesting that the Fed will respond to higher inflation
prints by becoming slightly more hawkish and normalizing front end rates," Lisa Hornby, Head of
U.S. Multi-Sector Fixed Income at Schroders told the Reuters Global Markets Forum.
    "That will have an impact of slowing down growth and subsequent inflation data longer term,
so the result is higher front end rates, and lower back end rates."
    Fed funds futures showed a 90% chance of a rate hike by September 2022 in the wake of the
CPI data, and fully priced in a Fed tightening by October of next year.
    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 118.3 basis points after falling to 116.9, its lowest level in two weeks. The curve had
steepened to a 3-1/2 month high of 129.7 on Friday.
    Minutes from the Fed's September meeting showed policymakers indicated they could begin to
taper their support measures for the economy in mid-November, but remained split over how big of
a threat high inflation represents and how soon they may need to raise rates in response.

    On Tuesday, three U.S. Federal Reserve policymakers said the economy has healed enough for
the central bank to begin to withdraw its crisis-era support, cementing expectations the Fed
will start to taper its monthly bond purchases as soon as next month.
    The yield on 10-year Treasury notes was down 3.1 basis points to 1.549%.
    Analysts said an auction of $24 billion of 30-year bonds was strong, with primary dealers
buying a record low 12.3%.
    The yield on the 30-year Treasury bond was down 6.4 basis points to 2.041%.

      October 13 Wednesday 2:32PM New York / 1832 GMT
 US T BONDS DEC1               159-22/32    1-4/32
 10YR TNotes DEC1              131-60/256   0-24/256
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.05         0.0507    -0.002
 Six-month bills               0.0575       0.0583    0.002
 Two-year note                 99-199/256   0.364     0.016
 Three-year note               99-232/256   0.6566    0.016
 Five-year note                98-252/256   1.0858    0.012
 Seven-year note               99-40/256    1.3775    -0.010
 10-year note                  97-72/256    1.549     -0.031
 30-year bond                  99-20/256    2.0414    -0.064

                               Last (bps)   Net
 U.S. 2-year dollar swap        12.75         0.75
 U.S. 3-year dollar swap        13.25        -2.00
 U.S. 5-year dollar swap         7.25        -0.75
 U.S. 10-year dollar swap        1.25        -0.50
 U.S. 30-year dollar swap      -23.50         0.25

 (Additional reporting by Lisa Pauline Mattackal; Editing by Kirsten Donovan and Nick Zieminski)

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