TREASURIES-U.S. yields hit fresh highs as rate hike concerns grip markets

BY Reuters | ECONOMIC | 09/26/22 03:33 PM EDT
    (Adds details, updates prices)
    By Davide Barbuscia
       NEW YORK, Sept 26 (Reuters) - U.S. Treasury yields hit
fresh 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.
    Global bond yields - which move inversely to prices - kept
climbing after a week that saw the Federal Reserve deliver its
third straight 75 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. Atlanta Fed
President Raphael Bostic said on Monday events in the United
Kingdom could raise economic stress in Europe and the United
States.
    Two-year Treasury yields, which tend to be more
sensitive to interest rate changes, rose to a fresh 15-year high
of 4.312%, and benchmark 10-year note yields rose
nearly 20 basis points from their Friday close, climbing to an
intra-day high of 3.9%, 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.
    Reflecting expectations of tighter monetary policies, real
yields - represented by the yield on Treasury
Inflation-Protected Securities (TIPS) - jumped on Monday. The
five-year TIPS yield climbed about 25 basis points
to 1.87%, its highest since January 2009, and the 10-year real
yield rose over 20 bps hitting 1.57%, its highest since April
2010.
    Concerns that a Fed, dead-set on bringing inflation down,
may tighten financial conditions to the point of pushing 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 44.5 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.
    Boston Fed President Susan Collins said on Monday that the
Fed's need to bring down high inflation will cause the jobless
rate to rise but that a recession was not
inevitable.
    Fed officials said last week they see rates rising to 4.6%
in 2023, much higher than previous views, and 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 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             3.2025       3.272     0.077
 Six-month bills               3.7875       3.913     0.026
 Two-year note                 98-14/256    4.3125    0.098
 Three-year note               97-138/256   4.3933    0.164
 Five-year note                95-116/256   4.1549    0.171
 Seven-year note               94-100/256   4.062     0.188
 10-year note                  90-208/256   3.8777    0.181
 20-year bond                  91-56/256    4.0204    0.125
 30-year bond                  87-116/256   3.697     0.085

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        34.25        -5.50
 spread
 U.S. 3-year dollar swap         7.50        -6.75
 spread
 U.S. 5-year dollar swap         4.75        -2.25
 spread
 U.S. 10-year dollar swap        1.50        -2.25
 spread
 U.S. 30-year dollar swap      -39.50        -3.25
 spread

 (Reporting by Davide Barbuscia;
Editing by Nick Zieminski and Andrea Ricci)

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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