TREASURIES-U.S. 10-year yield jumps to 12-1/2 year high

BY Reuters | ECONOMIC | 09/27/22 03:18 PM EDT

(Adds Kashkari comments, updates prices)

By Gertrude Chavez-Dreyfuss and Chuck Mikolajczak

NEW YORK, Sept 27 (Reuters) - Benchmark U.S. 10-year Treasury yields rose to their highest level in about 12-1/2 years on Tuesday as investors girded for higher interest rates that could possibly remain for longer than anticipated as Federal Reserve officials held firm in their hawkish stance.

U.S. 10-year yield hit 3.992%, the highest since April 5, 2010. It was last up 8.3 basis points to 3.964%.

Since August 2, the 10-year yield has surged by 145 bps.

U.S. 30-year yields also touched a milestone on Tuesday, advancing to 3.847%, the strongest level since January 2014. The yield was last up 13.2 basis points to 3.829%.

Fed officials have been resolute in their comments that the central bank will take strong steps in raising interest rates to combat rising prices until they see extended evidence that inflation is on the wane.

"That is going to be the name of the game for the next four to six months, inflation is not headed lower on a string, it is going to be a bumpy road to get down below 3%," said John Luke Tyner, fixed income analyst at Aptus Capital Advisors In Fairhope, Alabama.

"We are in for a world of pain until the problem gets cleared by."

Chicago Fed President Charles Evans, St. Louis Fed President James Bullard and Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday all reiterated the central bank's stance and pushed yields higher.

Evans said the Fed will need to raise interest rates to a range between 4.50% and 4.75%, a more aggressive stance than he had previously embraced. Evans will be a voter at next year's Federal Open Market Committee (FOMC).

Bullard, a current voter at this year's policy meeting, said he sees the likely peak for policy rate at 4.5%, and noted that the Fed will have to stay at the higher rate for some time.

Kashkari, an alternate voting member, said U.S. central bankers are united in their determination to do what is needed to bring inflation down.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, remained inverted at -35.1 basis points. This curve has been inverted since July 5.

An inversion of this specific yield curve is widely seen as a reliable indicator of an impending recession.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.2 basis points at 4.312%. On Monday, it surged to 15-year high of 4.36%.

U.S. data on Tuesday indicated the economy may be able to sustain growth even in the face of higher interest rates, as new orders for U.S.-manufactured capital goods increased more than expected in August. In addition, an index on consumer confidence rose for September rose to 108 from the prior month and and topped expectations of 104.5

Sales of new U.S. single-family homes also showed a surprise increase in August. New home sales surged 28.8% to a seasonally adjusted annual rate of 685,000 units, data showed. July's sales pace was revised higher to 532,000 units from the previously reported 511,000 units. (Reporting by Chuck Mikolajczak 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.

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.

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