TREASURIES-Yields hit four-week highs on British inflation, Fed expectations

By Karen Brettell NEW YORK, April 19 (Reuters) - Benchmark 10-year Treasury yields reached four-week highs on Wednesday, while interest rate sensitive two-year yields hit a five-week top, as global yields were dragged upwards by higher than expected inflation in Britain and as investors priced for the possibility the Federal Reserve could keep hiking rates. Britain was the only country in western Europe with double-digit inflation in March. Consumer price inflation (CPI) dropped to an annual rate of 10.1%, down from 10.4% in February but well above the 9.8% forecast by economists polled by Reuters and the 9.2% predicted by the Bank of England in February. U.S. Treasury yields rose on follow through from the British data, while investors are also “reawakening to the possibility that the Fed may not be pausing,” said Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee. Yields tumbled in March as investors flocked to the safe haven debt on concerns about contagion from the collapse of two regional banks including Silicon Valley Bank. They are now moving higher as the banking sector appears to have stabilized, while economic data also points to a still relatively strong economy. Several Fed officials have adopted a hawkish tone on the need to keep hiking rates in order to bring down inflation even as markets price for likely rate cuts later this year.

Fed funds futures traders are pricing in an 88% probability the Fed will hike rates by an additional 25 basis points at its May 2-3 meeting. Odds have also been rising for an additional 25 basis points increase in June, though a pause is still seen as the base case. Benchmark 10-year yields rose to 3.639%, the highest since March 22. They are up from a seven-month low of 3.253% on April 6. Two-year yields reached 4.286%, the highest since March 15. The inversion in the yield curve between two-year and 10-year notes deepened to minus 64 basis points. Investors are also focused on whether Congress will raise the debt ceiling, with some analysts concerned that the Treasury could run out of money faster than previously expected due to weak tax receipts. “People are beginning to get nervous because early April receipts are behind some people’s projections. We’re not certain, we think Treasury built in less than the bonanza style receipts we got last April into their projections for 2023, but you can’t know that,” said Vogel. Vogel added that Treasury’s refunding announcement on May 3 could provide more clarity on its funding situation. The Treasury will sell $12 billion in 20-year bonds on Wednesday.

April 19 Wednesday 9:43AM New York / 1343 GMT Price Current Net Yield % Change (bps) Three-month bills 5.0375 5.1733 -0.017 Six-month bills 4.885 5.0922 0.002 Two-year note 99-78/256 4.2501 0.051 Three-year note 99-104/256 3.9626 0.057 Five-year note 99-140/256 3.7258 0.051 Seven-year note 99-184/256 3.671 0.051 10-year note 99-16/256 3.6138 0.042 20-year bond 99-64/256 3.9295 0.028 30-year bond 96-180/256 3.8107 0.023
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 29.50 0.00
spread
U.S. 3-year dollar swap 19.75 0.00
spread
U.S. 5-year dollar swap 8.25 0.25
spread
U.S. 10-year dollar swap 0.25 0.25
spread
U.S. 30-year dollar swap -41.25 0.50
spread

(Reporting by Karen Brettell; Editing by Andrea Ricci)

Reuters

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