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TREASURIES-Two-year yields highest since 2008 as inflation soars

reuters.com · 06/10/2022 11:58
TREASURIES-Two-year yields highest since 2008 as inflation soars

Adds milestones, bank predictions, updates prices

By Karen Brettell

- U.S. Treasury prices tumbled and short- and intermediate-dated yields reached their highest levels in over a decade on Friday after data showed that U.S. consumer prices soared in May.

The consumer price index increased 1.0% last month after gaining 0.3% in April, as gasoline prices hit a record high and the cost of food jumped. nL1N2XX118

"It's tough to find any solace in this inflation report," said Gennadiy Goldberg, a senior rates strategist at TD Securities in New York.

"The fact that we continue to see strong inflation prints is going to keep the Fed thinking that more 50 basis points hikes could be on the cards," Goldberg said.

Two-year yields US2YT=RR, which are highly sensitive to interest rate hikes, spiked to 3.007%, the highest since June 2008. Benchmark 10-year yields US10YT=RR reached 3.152%, the highest since May 9.

Three-year yields US3YT=RR also jumped to their highest levels since Dec. 2007 and five-year yields US5YT=RR were the highest since Sept. 2008 as traders priced in more aggressive rate hikes by the Federal Reserve and a higher terminal rate.

The U.S. central bank is expected to hike rates by 50 basis points when it meets next week, with a further 50 basis point increase priced in for July and a strong chance of a similar move in September.

Goldman Sachs said on Friday that it now expects the Fed to hike rates by 50 basis points in September, up from its previous expectation of a 25 basis point increase.

Analysts at Barclays were even more aggressive, saying that they expect the Fed will raise rates by 75 basis points next week.

"We think the US central bank now has good reason to surprise markets by hiking more aggressively than expected in June," the Barclays analysts said.

Fed funds futures traders expect the Fed's benchmark rate to increase to 3.58% next May, from 0.83% now. FEDWATCH, USONFFE=

The closely watched two-year, 10-year Treasury yield curve US2US10=TWEB flattened as far as 11 basis points, from 22 basis points before the data.

Parts of the yield curve also reinverted, with the three-year/10-year and five-year/30-year portions inverting for the first time since May 4. Three-year to seven-year yields are all trading above those on 10-year notes. US3US10=TWEB, US5US30=TWEB

"The market expects the Fed to be aggressive, and what comes with that is a higher risk of a recession and a higher risk of the curve inverting," said Goldberg.

Inflation expectations also rose. Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS), which reflect expected average annual inflation for the next five years, increased to 3.16%, from 3.11% on Thursday. USBEI5Y=RR


June 10 Friday 11:43AM New York / 1543 GMT


Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

1.31

1.3324

0.058

Six-month bills US6MT=RR

1.9175

1.9627

0.155

Two-year note US2YT=RR

99-18/256

2.9905

0.174

Three-year note US3YT=RR

99-42/256

3.1693

0.165

Five-year note US5YT=RR

97-82/256

3.2131

0.148

Seven-year note US7YT=RR

97-32/256

3.2139

0.129

10-year note US10YT=RR

97-176/256

3.148

0.106

20-year bond US20YT=RR

96-228/256

3.4673

0.066

30-year bond US30YT=RR

93-80/256

3.225

0.055





DOLLAR SWAP SPREADS




Last (bps)

Net Change (bps)


U.S. 2-year dollar swap spread

37.50

0.25


U.S. 3-year dollar swap spread

18.25

-0.50


U.S. 5-year dollar swap spread

4.00

-1.50


U.S. 10-year dollar swap spread

6.00

-0.75


U.S. 30-year dollar swap spread

-24.00

-1.25



(Editing by Barbara Lewis, Kirsten Donovan)

((karen.brettell@thomsonreuters.com))