TREASURY – Yields jump, the 10-year surpasses 1.6% for the first time since June

 (Recasts; updates yields; adds analyst comments, breakeven
inflation rates, and upcoming auctions)
    By Karen Pierog
    CHICAGO, Oct 8 (Reuters) - U.S. Treasury yields hit
multi-month highs on Friday in the wake of a
weaker-than-anticipated September employment report that was
still expected to keep the Federal Reserve on track with its
tapering plans and as inflation expectations rose.  
    The benchmark 10-year yield, which dropped to a
session low of 1.558% shortly after the jobs data, later climbed
to its highest level since June 4 at 1.617%. It was last up 3.2
basis points at 1.603%. Yields on 20- and 30-year bonds also
jumped to levels previously seen in June before easing later in
the session. 
    "Treasuries are under a great deal of stress based on
positioning for Fed tapering and also rising concerns about
inflation," said John Canavan, lead analyst at Oxford Economics.
     Analysts said despite underwhelming jobs data, the Fed next
month was likely to announce plans to reduce its $120 billion in
monthly bond purchases.
     "Obviously, the headline payroll number was on the soft
side, but with the upward revisions to the previous two months,
I would say it was a good enough report or a decent report to
qualify for the Fed to start tapering," said Kathy Jones, chief
fixed income strategist at the Schwab Center for Financial
Research in New York.
    The Labor Department said in its closely-watched employment
report that nonfarm payrolls increased by 194,000 jobs last
month. Data for August was revised to show 366,000 jobs created,
instead of the previously reported 235,000 positions.

    Economists polled by Reuters had forecast payrolls
increasing by 500,000 jobs. Estimates ranged from as high as
700,000 jobs to as low as 250,000. The unemployment rate fell to
4.8% from 5.2% in August.
    Jones said the trajectory of the Treasury market was
unchanged. 
    "We've had a steeper yield curve, rising yields,
expectations for the Fed to start tightening sometime in 2022 --
all that seems to be intact," she said. 
    The five-year note yield, which is more sensitive
to intermediate interest rate hikes, reached its highest level
since February 2020 at 1.059%. It was last up 2.9 basis points
at 1.0481%. 
    Futures on the federal funds rate, which track short-term
interest rate expectations, priced in a quarter-point tightening
by the Fed either by November or December.
    Canavan said that rising energy prices were fueling
inflation concerns. Inflation expectations climbed on Friday to
their highest levels since May before easing back later in the
session. The breakeven rate on five-year Treasury
Inflation-Protected Securities (TIPS) hit 2.679%.
For 10-year TIPS, it rose to 2.520%. 
    Meanwhile, the U.S. Senate late on Thursday passed a stopgap
fix to the debt ceiling impasse that is expected to be taken up
by the House next week. The plan would raise the debt limit by
$480 billion, pushing the possibility of a government debt
default from this month into early December.
    "In the (Treasury) bill market, there's just a shift in
which yields are under the most pressure," Canavan said.
    Yields on Treasury bills due in October and early November
had turned sharply higher on a default risk around Oct. 18 --
the date the U.S. Treasury projected it would run out of cash.
They rapidly declined after the temporary fix surfaced in the
U.S. Congress on Wednesday, but yields in December maturities in
turn have risen, according to Canavan. 
     A closely watched part of the yield curve that measures the
gap between yields on two- and 10-year Treasury notes
 was last about 2 basis points steeper at 128.52
basis points. The gap between five-year notes and 30-year bonds
 steepened by about 1 basis point at 111.38 basis
points.
   Following Monday's market close for the Columbus Day holiday,
the U.S. Treasury will auction $58 billion of three-year notes
and $38 billion of 10-year notes on Tuesday and $24 billion of
30-year bonds on Wednesday.
October 8 Friday 3:01PM New York / 1901 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.05         0.0507    -0.002
 Six-month bills               0.06         0.0609    0.000
 Two-year note                 99-222/256   0.3178    0.011
 Three-year note               99-104/256   0.58      0.020
 Five-year note                99-42/256    1.0481    0.029
 Seven-year note               99-24/256    1.3869    0.032
 10-year note                  96-204/256   1.603     0.032
 20-year bond                  94-68/256    2.105     0.027
 30-year bond                  96-132/256   2.1589    0.026
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        11.25         1.00    
 spread                                               
 U.S. 3-year dollar swap        14.25         0.75    
 spread                                               
 U.S. 5-year dollar swap         8.50         0.50    
 spread                                               
 U.S. 10-year dollar swap        2.00         0.50    
 spread                                               
 U.S. 30-year dollar swap      -25.00         0.50    
 spread (Reporting by Karen Pierog, additional reporting by Gertrude
Chavez-Dreyfuss in New York; Editing by Dan Grebler and Nick
Zieminski)
  

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