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

(Adds 20-year auction results, Beige Book, updates prices) By Karen Brettell NEW YORK, April 19 (Reuters) - Benchmark 10-year Treasury yields edged down from four-week peaks reached earlier on Wednesday but remained higher on the day as global yields were dragged upward by higher-than-expected inflation in Britain and as investors priced for the possibility the Federal Reserve could keep hiking interest 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 a 90% 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. U.S. economic activity was little changed in recent weeks as employment growth moderated somewhat and price increases appeared to slow, according to a Fed report published on Wednesday.

Benchmark 10-year yields rose to 3.639%, the highest since March 22, before falling back to 3.599%. 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, and last traded at 4.263%. The inversion in the yield curve between two-year and 10-year notes deepened to minus 67 basis points. The Treasury saw solid demand for a $12 billion sale of 20-year bonds on Wednesday. The bonds sold at a high yield of 3.920%, close to where they had traded before the auction. Demand for the debt was 2.66 times the amount on offer, the highest since January. 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 the Treasury’s refunding announcement for the second quarter on May 3 could provide more clarity. April 19 Wednesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 5.005 5.1395 -0.050 Six-month bills 4.885 5.0922 0.002 Two-year note 99-72/256 4.2628 0.064 Three-year note 99-102/256 3.9654 0.059 Five-year note 99-146/256 3.7206 0.046 Seven-year note 99-200/256 3.6607 0.041 10-year note 99-48/256 3.5985 0.026 20-year bond 99-132/256 3.91 0.008 30-year bond 97-20/256 3.7892 0.001
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 7.75 -0.25
spread
U.S. 10-year dollar swap -1.00 -1.00
spread
U.S. 30-year dollar swap -42.00 -0.25
spread

(Reporting by Karen Brettell; Editing by Andrea Ricci and Jonathan Oatis)