Bonds News

TREASURIES-10-year yield hits 3-year high with inflation data on deck

(Updates prices, changes dateline; previous LONDON)

NEW YORK, April 11 (Reuters) - The benchmark 10-year U.S. Treasury yield rose on Monday to its highest level in more than three years as investors awaited key inflation data later this week to determine how hawkish the Federal Reserve will need to be on its policy path.

Markets are bracing for Tuesday’s consumer price index (CPI) reading for March, with expectations for a year-over-year increase of 8.4%, according to Reuters estimates. February’s data showing a 7.9% increase was the largest annual reading in 40 years. On Wednesday, the producer price index (PPI) will be announced.

“The risk would be on the downside in that there is an indication that maybe inflation might have peaked, that would get a little bit of a reaction from the market,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

“I don’t think it changes the overall tone but it does put the brakes on.”

The yield on 10-year Treasury notes was up 3.8 basis points to 2.753% after climbing to 2.784%, its highest level since January 2019. The yield was on track to climb for a seventh straight session.

With ultra-hot inflation likely forcing the Fed’s hand to raise rates, likely slowing the economy and possibly inducing a recession, riskier assets have been under pressure this year as yields rise. The S&P 500 is down more than 6% this year and growth stocks, which are more likely to see earnings suffer in a rising rate environment, are down more than 12% for the year.

Fed policymakers have repeatedly commented on the need for the central bank to be more aggressive in taking steps to combat high inflation, including raising rates. On Sunday, Cleveland Fed president Loretta Mester said inflation will remain high this year and next even as the Fed moves steadily to lower the pace of price increases.

The central bank rose rates by 25 basis points at its March meeting, its first hike since 2018, and expectations for a 50 basis point hike at its May meeting stand at 82.1%, according to CME's FedWatch Tool here.

The yield on the 30-year Treasury bond was up 5.1 basis points to 2.797% after touching 2.803%, its highest since May 2019.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 22.9 basis points. The spread has begun to steepen again after briefly inverting at the end of March, which is seen by many as a reliable recession indicator.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.2 basis points at 2.522%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.291%, after closing at 3.304% on Friday.

The 10-year TIPS breakeven rate was last at 2.881%, indicating the market sees inflation averaging 2.9% a year for the next decade.

Reporting by Chuck Mikolajczak Editing by Nick Zieminski