September 19, 2018 / 7:50 PM / a month ago

TREASURIES-Inflation, waning trade fears push 10-year yield near 2011 peak

(Updates yields, adds analyst quotes)

By Kate Duguid

NEW YORK, Sept 19 (Reuters) - The U.S. 10-year Treasury note yield hit fresh four-month highs on Wednesday, nearing its 2011 peak as the market shrugged off trade fears and mounting inflation and strong economic data raised expectations of a hawkish Federal Reserve meeting next week.

Longer-dated bond yields rose for the third day in a row, steepening the yield curve, and extending a rally in the 10- and 30-year yields that began at the start of the month. The benchmark government bond yield has risen 22.1 basis points since Aug. 31, with the 30-year up 22.6 basis points over the same period.

The day’s highs - the 10-year at 3.092 percent and the 30-year at 3.248 percent - were hit early in the North American session after a report that U.S. homebuilding increased more than expected in August. The housing starts data add to the strong economic picture painted by recent jobs numbers. A rise in U.S. average hourly earnings in monthly nonfarm payrolls reports for July and August has backed the view that inflation is picking up, justifying the Fed’s continued tightening.

Wednesday’s move “is really about repricing the market ahead of next week’s expected hawkish Fed,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

The prices of safe-haven assets such as Treasuries have also fallen, while global equities have rallied, as investors have bet that the escalating U.S.-China trade fight would inflict less damage than expected. The Dow Jones Industrial Average on Wednesday hit its highest level since late January.

“There’s a clear risk-on sentiment, which you can see in the equity markets,” said Lyngen.

Heavy corporate bond supply this week has also been a factor in the Treasury sell-off. Traders typically sell Treasuries to reallocate those funds to new corporate issues.

Treasury prices have also fallen as corporate pension fund demand for longer-dated debt has slowed. Contributions to pensions by corporate sponsors surged in 2018 as companies sought to deduct contributions at the old, higher tax rate of 30 percent before it expired on Sept. 15. As pensions become better funded, they shift holdings from equities into debt, raising demand for high-quality, longer-dated bonds.

The breakout in U.S. Treasury yields has driven the spread between the 10-year U.S. yield and the 10-year German government bond yield to 2.593 basis points, its widest since May 28, when it hit the highest level since 1989.

The three-day rally in longer-dated maturities steepened the yield curve, with the spread between 2-year and 10-year yields hitting a high of 27.6 basis points, up from Monday’s open at 19.10 basis points. The spread between the 5- and 30-year yields hit a high of 27.9 basis points, up from Monday’s open at 22.8 basis points.

Reporting by Kate Duguid; editing by Jonathan Oatis and Richard Chang

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