TREASURIES-U.S. yields rise as 10-year posts biggest annual gain in decades

BY Reuters | ECONOMIC | 12/30/22 03:13 PM EST

(Adds comment, updates prices)

By Chuck Mikolajczak

NEW YORK, Dec 30 (Reuters) - The benchmark U.S. 10-year Treasury yield rose on Friday, ending the trading year with its biggest annual gain in decades as the Federal Reserve embarked on a path of policy tightening to tackle inflation.

The 10-year has risen about 238 basis points this year, its biggest yearly climb since at least 1953, according to Refinitiv data, as the U.S. central bank has raised interest rates at its fastest pace since the 1980s to fight stubbornly high inflation after years of loose monetary policy.

"You still have a tight labor force, so you still have pressure on inflation, that is going to keep rates needing to be at a higher level than they used to be from the central banks," said Thomas Martin, senior portfolio manager at Globalt Investments in Atlanta, Georgia.

"So we are trying to work towards that more normal thing but it is going to take a while."

The yield on 10-year Treasury notes was up 4.4 basis points to 3.879%.

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 on policy announcements from the U.S. central bank, the Bank of England and the European Central Bank earlier this month, touching a seven-week high of 3.905% on Friday.

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

The yield on the 30-year Treasury bond was up 5.2 basis points to 3.975%.

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

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 55.3 basis points. An inversion is seen by many as a signal of recession.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 6.1 basis points at 4.428%. The two-year has shot up about 370 basis points this year, its biggest annual increase since the start of its regular issuance in 1972.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.382%, after closing at 2.375% on Thursday.

The bond market closed early on Friday at 2 p.m. EST and will be closed on Monday for the New Year's Day holiday.

The 10-year TIPS breakeven rate was last at 2.302%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; editing by Barbara Lewis and Chizu Nomiyama)

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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