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Yields jump after Fed's Powell adopts hawkish tilt

Kitco News

NEW YORK, Dec 1 (Reuters) - U.S. Treasury yields bounced on Wednesday, with shorter-dated note yields making the largest gains, as investors adjusted to the likelihood that the U.S. Federal Reserve will speed up the pace of its bond taper and will raise rates as soon as mid-2022.

Yields had dipped on Tuesday as concerns about the spread of the Omicron coronavirus variant dented risk appetite and sent stocks sharply lower.

But that focus shifted after Fed Chair Jerome Powell said that U.S. central bankers in December will discuss whether to end their bond purchases a few months earlier than had been anticipated, pointing to a strong economy, stalled workforce growth, and high inflation that is expected to last into mid-2022. read more

"Powell yesterday in his hawkish tilt removed a good deal of potential uncertainty in terms of coming Fed rhetoric as he basically confirmed that the hawkish shift that we've heard from other officials since the last FOMC remains intact," said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York.

Benchmark 10-year yields rose 4 basis points to 1.482%, after dropping as low as 1.412% on Tuesday, which was the lowest since Sept. 24.

Tuesday's rally was likely exacerbated by month-end demand for longer-dated debt, Cohn said.

Two-year yields jumped 7 basis points to 0.591%. They are trading just below a high of 0.687% reached on Nov. 23, which was the highest since March 2020.

The yield curve between two-year and 10-year notes was at 89 basis points. It has flattened from 130 basis points in October as investors price more rate hikes into short- and intermediate-dated notes, while longer-dated debt remains relatively in demand on expectations that the rate hikes will dampen inflation and growth longer-term.

Futures traders are almost fully pricing in a rate increase at the Fed's June 2022 meeting.

Treasuries showed little reaction to the ADP National Employment Report on Wednesday that showed that private payrolls increased by 534,000 jobs last month. The next major U.S. economic release will be Friday's jobs report for November. read more

Volatility is expected to stay high at least through year-end as the market struggles with low liquidity and uncertainty around the Fed's future rate path. The ICE BofA MOVE Index (.MOVE), a measure of volatility in U.S. Treasuries, is trading at its highest level since March 2020.

Inflation expectations have also fallen as investors price in the greater likelihood of faster rate increases.

Breakeven rates on five-year Treasury Inflation-Protected Securities have fallen to 2.79%, from around 3.20% in mid-November.

December 1 Wednesday 9:36AM New York / 1436 GMT

Price
Current Yield %
Net Change (bps)
Three-month bills
0.055
0.0558
0.003
Six-month bills
0.1075
0.1091
0.005
Two-year note
99-210/256
0.5908
0.065
Three-year note
99-158/256
0.8816
0.070
Five-year note
100-56/256
1.2047
0.058
Seven-year note
100-154/256
1.4094
0.045
10-year note
99-4/256
1.4817
0.041
20-year bond
101-184/256
1.8961
0.048
30-year bond
101-64/256
1.8207
0.035
DOLLAR SWAP SPREADS
Last (bps)
Net Change (bps)
U.S. 2-year dollar swap spread
23.50
-1.75
U.S. 3-year dollar swap spread
22.00
-1.50
U.S. 5-year dollar swap spread
11.25
-1.00
U.S. 10-year dollar swap spread
6.25
-0.75
U.S. 30-year dollar swap spread
-17.00
-1.00
Editing by Mark Heinrich and Peter Graff
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