TREASURIES-U.S. yields rise as investors gauge effect of China reopen on Fed

BY Reuters | ECONOMIC | 12/28/22 02:42 PM EST

(Adds auction results; updates prices)

By Chuck Mikolajczak

NEW YORK, Dec 28 (Reuters) - The yield on the benchmark U.S. 10-year Treasury rose for a third straight day on Wednesday, reversing an earlier decline, as investors attempted to navigate the impact of China's reopening policy on the path of interest rate hikes by the U.S. Federal Reserve.

While China has quickly reversed course on its previous "zero-COVID" policy this month, which is likely to benefit the global economy, the change has come with a surge in cases that could hamper the economy in the short-term.

The yield on 10-year Treasury notes was up 2.5 basis points to 3.883% after hitting a six-week high of 3.89%. On Tuesday, the 10-year jumped 11.1 basis points, its biggest one-day rise since Oct. 19.

"First glance was with the reopening it would end up if not being inflationary, certainly sort of arrest the decline in inflation," said Sam Stovall, chief investment strategist at CFRA in New York.

"Now with an increase in demand for materials and whatnot, that could put a support underneath prices and another reason why inflation could end up being stickier."

After hitting a near-three-month low on Dec. 7 as hopes grew the Fed would signal that an end to its rate hike cycle was on the horizon, the 10-year yield has steadily climbed. It saw its biggest weekly rise in 8-1/2 months last week on the heels of policy announcements from the U.S. central bank, the Bank of England and the European Central Bank.

The yield on the 30-year Treasury bond was

up 3.3 basis points




Forecasts by the U.S. central bank see the fed funds rates climbing above 5% next year, while Fed Chair Jay Powell and other Fed officials have emphasized there may be a need to keep rates at a higher level for longer to completely stamp out inflation.

Analysts have cautioned that it is difficult to put too much weight on market direction this week given the limited trading activity around the holidays.

An auction of $43 billion in five-year notes was viewed as solid by analysts, with a high yield of 3.973% and demand for the debt at 2.46 times the notes on sale was better than average.

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 an indicator of economic expectations, was at a negative 47.8 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.1 basis points at 4.357%.

The breakeven rate on five-year U.S. Treasury inflation-protected securities (TIPS) was last at 2.369%, after closing at 2.368% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.289%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama and Leslie Adler)

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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