TREASURIES-U.S. yields edge lower after high reading of core PCE index

BY Reuters | ECONOMIC | 09/30/22 10:16 AM EDT
       By Herbert Lash
       NEW YORK, Sept 30 (Reuters) - Yields on U.S. Treasuries moved lower on
Friday after a reading of core inflation rose more than expected, suggesting the
Federal Reserve will continue to aggressively raise interest rates to tame high
consumer prices.
    The personal consumption expenditures price index rose 0.3% last month after
dipping 0.1% in July. In the 12 months through August, the PCE price index
increased 6.2%, down from 6.4% the previous month, the Commerce Department said.

    But excluding volatile food and energy, the PCE price index jumped 0.6% last
month after being unchanged in July and the so-called core PCE price index
climbed 4.9% on a year-on-year basis in August after increasing 4.7% in July.
    "Both headline and core were pretty bad," said Stan Shipley, fixed income
strategist at Evercore SI in New York.
    "Today's number was somewhat discouraging as the core reading was relatively
high month to month. The revisions put it even higher for the last two years
here."
    The two-year Treasury yield, which typically moves in step with
rate expectations, initially edged up after the reading but later fell 0.5 basis
point to 4.165%. The gap between two- and 10-year yields, a
recession harbinger, eased back a bit to -46.9 basis points.
    Shipley said the reading wasn't enough for the Fed to alter its rate-hiking
campaign, though he said by winter core inflation will have eased. The Fed has
lifted U.S. borrowing costs faster this year than any time since the 1980s.
    "It's not positive for the Fed step back," he said. "The Fed is going to
barge ahead."
    Fed Vice Chair Lael Brainard said on Friday the U.S. central bank will need
to maintain higher rates for some time and must guard against lowering them
prematurely.
    "Monetary policy will need to be restrictive for some time to have
confidence that inflation is moving back to target. For these reasons, we are
committed to avoiding pulling back prematurely," she said in prepared remarks
for a conference in New York.
    The Fed raised its median forecast for core PCE inflation to 4.5% this year
from its previous estimate of 4.3% in June. Its estimate for core inflation in
2023 was boosted to 3.1% from the previously projected 2.7% in June.
    The yield on 10-year Treasury notes fell 4.7 basis points to
3.700%, and the 30-year yield lost 3 basis points to 3.663%.
        The breakeven rate on five-year U.S. Treasury Inflation-Protected
Securities (TIPS) was last at 2.127%.
    The 10-year TIPS breakeven rate was last at 2.102%, indicating
the market sees inflation averaging about 2.1% a year for the next decade. The
rate has declined from more than 2.6% it showed five weeks ago.
    The U.S. dollar five 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 2.141%.
     Sept. 30 Friday 9:55 AM New York / 1355 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             3.245        3.3161    0.002
 Six-month bills                               3.8175       3.945     0.030
 Two-year note                                 100-41/256   4.1652    -0.005
 Three-year note                               98-38/256    4.173     -0.015
 Five-year note                                100-204/256  3.9475    -0.032
 Seven-year note                               100-52/256   3.8416    -0.041
 10-year note                                  92-52/256    3.7001    -0.047
 20-year bond                                  91-212/256   3.9735    -0.026
 30-year bond                                  88           3.6641    -0.029

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 28.75         0.25
 U.S. 3-year dollar swap spread                  7.50         0.75
 U.S. 5-year dollar swap spread                  5.50         1.00
 U.S. 10-year dollar swap spread                 4.75         0.50
 U.S. 30-year dollar swap spread               -42.00         0.50

 (Reporting by Herbert Lash; editing by Jonathan Oatis)

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