Funds News

TREASURIES-U.S. yields rise after inflation data cements March rate hike expectations

(Updates prices, adds milestones on 10-year and 30-year)

NEW YORK, March 10 (Reuters) - The benchmark U.S. 10-year Treasury yield rose on Thursday after U.S. inflation data confirmed rapidly rising prices, cementing expectations of a Federal Reserve interest rate hike next week, while the European Central Bank took a hawkish turn.

The consumer price index (CPI) rose 7.9% on an annual basis in February, it’s largest increase in 40 years and well above the U.S. central bank’s 2.0% target, the Labor Department reported.

Expectations that the Fed will raise its benchmark overnight interest rate by at least 25 basis points on March 16 stand at 95.9%, according to CME's FedWatch Tool here.

Inflation is likely to continue to accelerate as Russia’s war against Ukraine pushes up the prices of oil and other commodities. Oil prices bounced on Thursday following a sharp drop in the prior session as supply worries persist.

“The Fed can’t bring peace to Ukraine and Russia, so there’s little that monetary policy can do to tame food and energy inflation,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.

“It may have to just say that it is serious about fighting inflation, but it is also seriously hamstrung in what it can do right now.”

The yield on 10-year Treasury notes was up 4.9 basis points to 1.997% after hitting 2.013%, its highest level since Feb. 25. The 10-year yield is on track to climb for a fourth straight day, its longest streak of gains in a month.

The Russian government said on Thursday it has banned exports of telecom, medical, auto, agricultural, electrical and tech equipment, as well as some forestry products, until the end of 2022, in retaliation for Western sanctions on Moscow. Talks between Ukraine and Russia showed no progress.

With the Fed expected to start hiking rates to combat inflation next week, the European Central Bank took a hawkish turn on Thursday by accelerating its exit from COVID-19 pandemic stimulus measures. The ECB said it would end its asset purchases in the third quarter, paving the way for a rate hike later in the year.

The yield on the 30-year U.S. Treasury bond was up 8.1 basis points to 2.383% after touching 2.396%, its highest level since May 13.

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 27.2 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 4.5 basis points at 1.723%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.314%, after closing at 3.324% on Wednesday, just shy of the 3.402% record high set on Tuesday.

The 10-year TIPS breakeven rate was last at 2.862%, indicating the market sees inflation averaging 2.9% a year for the next decade.

The U.S. dollar five years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.597%. (Reporting by Chuck Mikolajczak; Editing by Andrew Heavens and Paul Simao)