Thursday, October 28

Short-term yields climb, curve flattens after inflation data


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NEW YORK — Yields on shorter-term US Treasuries rose on Wednesday, while

longer-dated yields dipped following data on consumer prices that further fanned concerns

inflation will continue to climb and force the Federal Reserve to take action.

The consumer price index (CPI) rose 0.4% last month after climbing 0.3% in August, the Labor

Department said on Wednesday. In the 12 months through September, the CPI increased 5.4% after

advancing 5.3% year-on-year in August. Prices are expected to rise further due to supply chain

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bottlenecks and a recent surge in the prices of commodities such as oil.

The yield on the two-year Treasury note, which typically moves in step with

interest rate expectations, was up 1.6 basis points to 0.364% after reaching a high of 0.394%,

its highest since March 24, 2020.

The three-year note yield was up 1.6 basis points to 0.657% after climbing to

0.701%, its highest since March 5, 2020.

But longer-dated yields fell, indicating the market is still not pricing in a sustained

period of inflation, which served to flatten the yield curve.

“The curve flattening is the market suggesting that the Fed will respond to higher inflation

prints by becoming slightly more hawkish and normalizing front end rates,” Lisa Hornby, Head of

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US Multi-Sector Fixed Income at Schroders told the Reuters Global Markets Forum.

“That will have an impact of slowing down growth and subsequent inflation data longer term,

so the result is higher front end rates, and lower back end rates.”

Fed funds futures showed a 90% chance of a rate hike by September 2022 in the wake of the

CPI data, and fully priced in a Fed tightening by October of next year.

A closely watched part of the US Treasury yield curve measuring the gap between yields on

two- and 10-year Treasury notes, seen as an indicator of economic expectations, was

at 118.3 basis points after falling to 116.9, its lowest level in two weeks. The curve had

steepened to a 3-1/2 month high of 129.7 on Friday.

Minutes from the Fed’s September meeting showed policymakers indicated they could begin to

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taper their support measures for the economy in mid-November, but remained split over how big of

a threat high inflation represents and how soon they may need to raise rates in response.

On Tuesday, three US Federal Reserve policymakers said the economy has healed enough for

the central bank to begin to withdraw its crisis-era support, cementing expectations the Fed

will start to taper its monthly bond purchases as soon as next month.

The yield on 10-year Treasury notes was down 3.1 basis points to 1.549%.

Analysts said an auction of $24 billion of 30-year bonds was strong, with primary dealers

buying a record low 12.3%.

The yield on the 30-year Treasury bond was down 6.4 basis points to 2.041%.

October 13 Wednesday 2:32PM New York / 1832 GMT

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Price

US T BONDS DEC1 159-22/32 1-4/32

10YR TNotes DEC1 131-60/256 0-24/256

Price Current Net

Yield% Change

(bps)

Three-month bills 0.05 0.0507 -0.002

Six-month bills 0.0575 0.0583 0.002

Two-year note 99-199/256 0.364 0.016

Three-year note 99-232/256 0.6566 0.016

Five-year note 98-252/256 1.0858 0.012

Seven-year note 99-40/256 1.3775 -0.010

10-year note 97-72/256 1.549 -0.031

30-year bond 99-20/256 2.0414 -0.064

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

US 2-year dollar swap 12.75 0.75

spread

US 3-year dollar swap 13.25 -2.00

spread

US 5-year dollar swap 7.25 -0.75

spread

US 10-year dollar swap 1.25 -0.50

spread

US 30-year dollar swap -23.50 0.25

spread

(Additional reporting by Lisa Pauline Mattackal; Editing by Kirsten Donovan and Nick Zieminski)

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