TREASURE – U.S. yields rise as Fed easing speculation wanes

NEW YORK, Oct 28 (Reuters) – U.S. Treasury yields rose on Friday after data showed underlying inflation pressures remained elevated and suggested the Federal Reserve would continue its aggressive interest rate hike campaign . The personal consumption expenditure price index rose 6.2% in the 12 months to September to match the previous month’s increase. The PCE core price index, which excludes food and energy, rose 5.1% annually after rising 4.9% in August. Market rates had fallen over the past week on speculation that the Fed may soon halt its hike, but with inflation not showing a significant decline, that sentiment has dissipated. “The market reaction makes sense,” said Priya Misra, head of global rates strategy at TD Securities. “Inflation won’t allow the Fed to take a break any time soon.” Fed funds futures forecast a 98.4% chance that the Fed will raise rates by 75 basis points when policymakers meet on November 1-2. Over the past week, the market has reduced its expectations for returns, peaking at nearly 5% in March 2023 to 4.85% in May. With few signs of slowing inflation, the yield spread on 3-month bills and 10-year notes remained negative at -12.3 basis points. The 10-year bond yield rose 2.6 basis points to 3.965%, while the 30-year yield fell 0.3 basis points to 4.091%. The two-year yield, which generally moves in line with interest rate expectations, rose 4.8 basis points to 4.369%. The five-year US Treasury Inflation-Protected Securities (TIPS) break-even rate was last at 2.654%. The 10-year TIPS break-even rate last stood at 2.503%, indicating that the market expects inflation to average around 2.5% per year over the next decade. The US dollar 5-year inflation-linked swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, last settled at 2.558%. Oct 28 Friday 9:57 AM New York / 1357 GMT Price Current Net Yield % Change (bps) Three-Month Bills 3.9875 4.0822 0.035 Six-Month Bills 4.345 4.5021 0.054 Two-Year Notes 100-3 /256 4.3688 0.048 Three-year note 99-196/256 4.3347 0.052 5-year note 99-240/256 4.139 0.049 7-year note 99-180/256 4.0491 0.043 10-year note 90-52/256 3.9668 0.028 20-year bond 87-40/256 4.3491 0.021 30-year bond 81-72/256 4.0928 -0.001 DOLLAR SWAP SPREADS Last (bps) Net change (bps) US dollar swap spread 2 years 37.50 2.75 US dollar swap spread 3 years 14.25 2.25 US dollar swap spread 5 years spread 6.25 2.25 US dollar swap spread 10 years 3.00 2.75 US dollar swap spread 30 years -47, 00 2.25 (Reporting by Herbert Lash; editing by Jonathan Oatis)

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