TREASURIES-US yields rise after data; 10-yr eyes biggest monthly drop in 12 years

BY Reuters | ECONOMIC | 11/30/23 10:44 AM EST

By Chuck Mikolajczak

NEW YORK, Nov 30 (Reuters) - U.S. Treasury yields climbed on Thursday, even after economic data on consumer spending and inflation provided more evidence the Federal Reserve could cease hiking interest rates, but the benchmark 10-year U.S. Treasury yield was poised for its biggest monthly drop since August 2011.

Data showed U.S. consumer spending rose moderately in October, while the annual increase in inflation was the smallest in more than 2-1/2 years. On the jobs front, initial jobless claims rose from the prior week to indicate a softening of the labor market.

"The monthly numbers were in line with expectations, year-over-year dropped and that's a good sign that inflation trends are moderating, which should make the markets happy," said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut

"The Fed is on hold, and (this report) gives them more comfort in staying on hold. What they're doing is working. The data is trending in the direction that the Fed wants to see."

The yield on 10-year Treasury notes rose 7 basis points (bps) to 4.34%. For the month, the 10-year yield is down 53.5 bps, on track for its biggest monthly fall since August 2011.

Softening economic data has heightened expectations that the Fed has completed its rate hike cycle, while projecting a greater likelihood that the central bank will need to cut rates in the coming months.

Markets are pricing in a nearly 75% chance that the Fed will cuts rates by at least 25 bps in May, according to CME's FedWatch Tool, up from about 55% a week ago.

Many Fed officials have refused to rule out the possibility another hike may be needed should the economic data change course, but yields fell sharply earlier this week after Fed Governor Christopher Waller, seen as a hawkish member of the central bank, flagged the possibility of a rate cut if inflation continues to decline.

The yield on the 30-year Treasury bond rose 5 bps to 4.498%.

Federal Reserve Bank of New York President John Williams said on Thursday that the Fed is likely done with interest rate hikes, but added that rates could rise again if inflation pressures do not continue to moderate. In addition, Francisco Federal Reserve President Mary Daly told the German newspaper Borsen-Zeitung that it is still "too early to know if the Fed is done with rate hikes.

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 negative 37.1 basis points after rising to negative 35.5, its shallowest inversion since Nov. 9.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 6 bps to 4.709%. The yield has tumbled 36.4 bps in November, on pace for its biggest drop since March.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.203% after closing at 2.168% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.249%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; additional reporting by Stephen Culp; editing by 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.

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