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TREASURIES-Yields fall on better than expected inflation, Poland missile fears

Reuters · 11/15/2022 15:28
TREASURIES-Yields fall on better than expected inflation, Poland missile fears

Adds reports of missiles hitting Poland, comments from Fed's Bostic; updates prices

By Karen Brettell


- U.S. Treasury yields fell on Tuesday after data showed that inflation rose less than expected in October and as reports that Russian missiles hit Poland raised fears about greater geopolitical risks in the region.

Benchmark 10-year yields hit almost six-week lows after U.S. producer prices increased at an annual rate of 8.0%, missing economists expectations of an 8.3% rise.

It comes after a smaller-than-expected gain in the October’s consumer price index on Thursday sent yields sharply lower on expectations that inflation may have peaked, which could open the door to more dovish Federal Reserve policy if price pressures continue to moderate.

"It seems to compound on the downside surprise to CPI," said Zachary Griffiths, senior investment grade strategist at CreditSights. "You're seeing the market price out a terminal rate that had been as high as above 5% and considering where policy goes from here."

The Fed's benchmark overnight interest rate is expected to top out at 4.90% in May. It has fallen from an expected peak of 4.95% in May that was priced in early on Monday. FEDWATCH

Yields also dipped in choppy trading on a report that Russian missiles crossed into Poland, killing two people. Russia was pounding cities across Ukraine with missiles on Tuesday, in attacks that Kyiv said were the heaviest wave of missile strikes in months of war.

Benchmark 10-year yields US10YT=RR fell as low as 3.758%, the lowest since Oct. 6, and were last at 3.803%. Two-year yields US2YT=RR fell as low as 4.321% and were last at 4.364%.

Retail sales data on Wednesday will be the major U.S. economic focus and investors will be watching for signs of weakness with the Fed’s rate hikes seen denting growth and consumer sentiment.

Atlanta Fed President Raphael Bostic said on Tuesday that he sees little evidence of slowing inflation and that borrowing costs will have to rise further for that to happen.

The Fed is widely expected to hike rates by an additional 50 basis points at its Dec. 13-14 meeting. The CPI reading for November is due to be released on Dec. 13.

Closely watched parts of the Treasury yield curve remained deeply inverted on Monday, reflecting concerns about an impending recession.

The two-year, 10-year part of the curve US2US10=TWEB was last at minus 57 basis points. The gap between three-month and 10-year yields US3MUS10Y=RR inverted as far as minus 49 basis points, the most inverted since late 2019, and was last at minus 46 basis points.

Inflation expectations also dropped. Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS) fell to 2.38%, the lowest since Oct. 13.


November 15 Tuesday 2:58PM New York / 1958 GMT


Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

4.135

4.2372

0.056

Six-month bills US6MT=RR

4.4125

4.5761

0.021

Two-year US2YT=RR

100-5/256

4.3635

-0.044

Three-year US3YT=RR

100-232/256

4.1751

-0.065

Five-year US5YT=RR

100-230/256

3.9234

-0.075

Seven-year US7YT=RR

100-184/256

3.8808

-0.062

10-year US10YT=RR

102-168/256

3.8031

-0.064

20-year bond US20YT=RR

88-212/256

4.2137

-0.070

30-year bond US30YT=RR

100-60/256

3.9865

-0.072





DOLLAR SWAP SPREADS




Last (bps)

Net Change (bps)


U.S. 2-year dollar swap spread

32.25

-2.50


U.S. 3-year dollar swap spread

13.25

-2.50


U.S. 5-year dollar swap spread

4.00

-0.50


U.S. 10-year dollar swap spread

-1.75

-0.50


U.S. 30-year dollar swap spread

-44.25

1.25



(Editing by Paul Simao and Nick Zieminski)

((karen.brettell@thomsonreuters.com))