US yields rise as markets grapple with rate hike, Fed balance sheet

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  • US 10-year yields at their highest since March 2021
  • US 2-year yields hit their highest level since March 2020
  • US 30-year rates hit 11-week peak
  • US 10-year TIPS yields at their highest since June 2021
  • US yield curve flattens for day 2

NEW YORK / LONDON, Jan.6 (Reuters) – US Treasury yields on most maturities rose on Thursday, as investors braced for an earlier-than-expected interest rate hike and the possibility that the Reserve Federal government is reducing its bond holdings sooner than initially. thought.

US yields stabilized a bit during the afternoon session, as market participants turned to Friday’s nonfarm employment report for further clues to the rate outlook.

The minutes of the last Fed meeting released on Wednesday indicate that it may have to hike interest rates sooner than expected and also reduce its overall holdings to curb high inflation.

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Some participants noted that it might be appropriate to start shrinking the Fed’s balance sheet relatively soon after the first hike, noting a big change in the tone of policymakers in recent months as inflation has stuck surprisingly. high. Read more

Fed funds futures imply an 80% chance of a 25 basis point tightening at the March Fed meeting and at least three rate hikes by the end of the year.

Analysts previously thought May or June was more likely for the first rate hike of this cycle.

“The Fed’s comment on balance sheet runoff shows that it recognizes that it is much further behind than it would have liked and that it is now focusing on rate hikes and tightening. financial conditions, “said Rob Daly, director of fixed income at Glenmede Investment Management.

US 2-year yields, which track short-term rate expectations, hit their highest level since early March 2020, the start of the global spread of COVID-19, at 0.87% and rose 5 points last base at 0.8796%. .

At the long end of the curve, 30-year yields peaked at 11 weeks at 2.138%, and were last little changed at 2.0896%.

Benchmark 10-year yields hit 1.7530%, the highest since March 2021, and last rose almost 3 basis points on the day to 1.7299%.

US 2-year yield, absolute weekly change in bp

U.S. economic figures on Thursday, meanwhile, were weak, with higher than expected jobless claims, a larger trade deficit, a disappointing U.S. service sector index and factory orders generally in line. Read more

But on a day when the Fed is the main story of bond investors, US data didn’t matter.

Thursday’s moves added to a tumultuous start to 2022 for the US bond market, which could be a wake-up call for other asset classes such as emerging markets.

The 10-year U.S. Treasury yields rose about 22 basis points this week, putting them on track for their biggest weekly jump since June 2020.

US 2-year yields rose about 15 basis points to their biggest weekly gain since October 2019.

The U.S. yield curve, meanwhile, continued to flatten, after steepening in the first two days of the year, suggesting investors are bracing for an impending rate hike that should push prices higher. short term returns. The spread between 5-year and 30-year yields was 61.7 basis points on Thursday.

The US 2-year / 10-year yield curve was also flatter at 84.8 basis points.

Real or inflation-adjusted yields also surged after the minutes. The 10-year Inflation-Protected Treasury (TIPS) yield on Thursday hit -0.743%, the highest since mid-June last year.

US 10-year real yields have risen more than 5 basis points for four consecutive sessions. It was the first time this had happened outside of a crisis since 2007.

The Fed holds more than $ 380 billion in inflation-linked notes and bonds. Demand for TIPS has eased with the reduction in asset purchases by the Fed and the prospect of the central bank selling outright.

January 6 Thursday 4:22 p.m. New York / 2122 GMT

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Additional reporting by Jamie McGeever in Florida; Editing by Jonathan Oatis

Our standards: Thomson Reuters Trust Principles.


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