TREASURIES-Treasury prices rebound after BoE decision

BY Reuters | ECONOMIC | 09/28/22 11:06 AM EDT
    (Adds comment, U.S. market open)
    By Herbert Lash
       NEW YORK, Sept 28 (Reuters) - U.S. Treasury prices rebounded sharply on
Wednesday after the Bank of England said it would buy long-dated British bonds
in a moved aimed at restoring financial stability in markets rocked globally by
the fiscal policy of the new government in London.
    The BoE sought to quell a firestorm in financial markets sparked by plans
announced last week by the new British government to slash taxes and ramp up
borrowing.
    The new economic agenda sent the pound to an all-time low against the
dollar, just above $1.03, and deepened a sell-off that created a bear market in
bonds for the first time in decades.
    Earlier in Asia, the yield on benchmark 10-year Treasuries
briefly topped 4% to hit a 12-year high of 4.004%. The yield later fell 16.2
basis points to 3.801% and bond prices rose after the BoE decision. Yields move
in the opposite direction of bond prices.
    The BoE's move put a circuit breaker on the upward spiral in yields and
stemmed the dollar's advance, the leading cause of fear and instability in
markets, said Jimmy Chang, chief investment officer at Rockefeller Global Family
Office.
    The decision also revived "a little bit of the hope that maybe the Fed won't
be as aggressive as it has sounded," Chang said. "Very quickly the market seems
to be dialing down the hawkish expectations.
    "They needed to come in and stabilize the market for now," Chang said of the
BoE. "But then they also say that they're going to be buying gilts into
mid-October. So what happens after that?"
    The implication is the British central bank will need to raise interest
rates aggressively, Chang said.
    "They've really been boxed in. They're dealing with stagflation and a market
just pushing back against what (new Prime Minister Liz) Truss has proposed with
very aggressive tax cuts," he said.
    The two-year Treasury yield, which typically moves in step with
interest rate expectations, fell 15.7 basis points to 4.151%.
    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 a
harbinger of a looming recession, initially flattened before trading little
changed at -35.0 basis points.
    The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities
(TIPS) was last at 2.358%.
    The 10-year TIPS breakeven rate was last at 2.304%, indicating
the market sees inflation averaging about 2.3% a year for the next decade. In
late August the breakeven rate was at 2.64%.
    The 10-year TIPS yield earlier hit a 12-1/2-year high at 1.692%.
    The U.S. dollar 5 years forward inflation-linked swap, seen by
some as a better gauge of inflation expectations due to possible distortions
caused by the Fed's quantitative easing, was last at 2.385%.
    The Treasury will sell $36 billion in seven-year notes with results of the
auction announced shortly after 1 p.m. ET (1700 GMT).
    Sept. 28 Wednesday 10:50 AM New York / 1450 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             3.2775       3.3508    0.023
 Six-month bills                               3.795        3.923     -0.026
 Two-year note                                 100-48/256   4.1513    -0.157
 Three-year note                               98-22/256    4.1936    -0.206
 Five-year note                                100-122/256  4.0188    -0.195
 Seven-year note                               94-252/256   3.9604    -0.181
 10-year note                                  91-104/256   3.8014    -0.162
 20-year bond                                  90-248/256   4.04      -0.09
 30-year bond                                  87-28/256    3.718     -0.110

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 30.75         2.75
 U.S. 3-year dollar swap spread                  7.00         5.00
 U.S. 5-year dollar swap spread                  2.50         2.25
 U.S. 10-year dollar swap spread                 2.00         3.50
 U.S. 30-year dollar swap spread               -43.25         1.75

 (Reporting by Herbert Lash, additional reporting by Tom Westbrook in Sydney;
Editing by Ana Nicolaci da Costa and Jonathan Oatis)

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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