TREASURIES-U.S. yields keep climbing as rate hike concerns grip markets

BY Reuters | ECONOMIC | 09/26/22 10:28 AM EDT
       By Davide Barbuscia
       NEW YORK, Sept 26 (Reuters) - U.S. Treasury yields were
up to new highs on Monday, rising in tandem with euro zone and
British government debt yields amid concerns that central banks
globally will keep tightening monetary policy to curb stubbornly
high inflation.
    The slump in global bonds on Monday followed a week that saw
the Federal Reserve deliver its third straight seventy-five
basis point rate hike and the British pound slide to a 37-year
low against the dollar after the country's new finance minister
unleashed historic tax cuts and huge increases in borrowing.
    Sterling dropped further on Monday, and a renewed sell-off
in British gilts pushed euro zone yields higher.
    Two-year Treasury yields, which tend to be more
sensitive to interest rate changes, rose to a fresh 15-year high
of 4.237%, and benchmark 10-year note yields were up
about 5 basis points from their Friday close, climbing to
3.746%. Last week, those yields jumped to an intra-day high of
3.829%, the highest since April 2010.
    "Back to back statements from Fed Chair Jerome Powell, first
from Jackson Hole and then last week, were clear and unambiguous
that the inflation has to be brought under control by any means
necessary ... finally the market is listening," said Dean Smith,
chief strategist at FolioBeyond.
    Concerns that a Fed, dead-set on bringing inflation down,
may tighten financial conditions to the point of tipping the
economy into sharp contraction continued to grip markets, but
some investors' expectations that the Fed may soon embark on a
policy U-turn to stimulate a dwindling economy were dashed when
Powell last week said that he and his fellow policymakers would
"keep at" their battle to beat down inflation.
    Bringing down price pressure is going to require "a
steepening of the yield curve, higher long-term rates and some
actually observed lower inflation prints, and we're not going to
see that this year," Smith said.
    The inversion in the yield curve between two-year and
10-year notes was at minus 46 basis points on
Monday, still deep in negative territory but steeper than last
week when that curve - seen as signaling an impending recession
- was the most inverted in at least two decades.
    The Fed last week updated the so-called "dot plot," which
indicates each policymaker's view of where rates should be at
the end of each year through 2025. Fed officials now see rates
rising to 4.6% in 2023, much higher than previous views. It also
projected year-end economic growth for 2022 at 0.2%, rising to
1.2% in 2023.
    "The Fed still sees positive growth this year and sees it
picking up next year. But it also wants to see evidence core
inflation is on a decisive 2% trajectory beyond 2023 before it
stops hiking," the BlackRock Investment Institute said in a note
on Monday.
    "This soft landing doesn't add up to us ... We think the Fed
is not only underestimating the recession needed but ignoring
that it's logically necessary," it said.
    September 26 Monday 9:21AM New York / 1321 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             3.15         3.218     0.023
 Six-month bills               3.7725       3.8972    0.010
 Two-year note                 98-49/256    4.2369    0.023
 Three-year note               97-226/256   4.2669    0.038
 Five-year note                95-252/256   4.0316    0.048
 Seven-year note               95-48/256    3.9251    0.051
 10-year note                  91-212/256   3.7467    0.050
 20-year bond                  92-120/256   3.9239    0.029
 30-year bond                  88-172/256   3.6236    0.012

                               Last (bps)   Net
 U.S. 2-year dollar swap        36.75        -3.00
 U.S. 3-year dollar swap        12.00        -2.25
 U.S. 5-year dollar swap         6.25        -0.75
 U.S. 10-year dollar swap        3.50        -0.25
 U.S. 30-year dollar swap      -37.00        -0.75

 (Reporting by Davide Barbuscia
Editing by 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.

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