Funds News

TREASURIES-U.S. yields rise on bearish rates outlook

    * Unexpected rise in retail sales adds to inflation fears
    * Five-year breakeven inflation rate highest since April

 (Adds comment, new prices)
    By Herbert Lash
    NEW YORK, Oct 15 (Reuters) - Treasury yields rose and a
market indication of inflation expectations hit the highest
since 2005 on Friday as an unexpected increase in U.S. retail
sales in September added to bearish bond sentiment about the
path of interest rates.
    The yield on benchmark 10-year U.S. Treasury notes
 rose 4.9 basis points to 1.569% amid fears that
supply constraints could disrupt the holiday shopping season
amid continued shortages of motor vehicles and other goods.
    Retail sales rose 0.7% last month and data for August was
revised higher to show retail sales increased 0.9% instead of
0.7% as initially reported by the Commerce Department.
    September sales were partly lifted by higher prices.
    "There's an overwhelming bearishness in the market from a
lot of the hedge funds and big macro accounts that think rates
are going to go up another 50 basis points by year-end or early
next year," said Tom di Galoma, a managing director at Seaport
Global Holdings in Greenwich, Connecticut. 
    The Federal Reserve will likely begin to taper its massive
bond purchases in December but will hold off on increasing the
federal funds rate for the moment, di Galoma said. 
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.727% after earlier hitting 2.753%, the highest since April
    The Fed's insistence that higher consumer prices is
transitory has been thoroughly debunked by now, said David
Petrosinelli, senior trader at InspereX.
    "The gorilla has been in the room for a long time, but maybe
the gorilla was a little too quiet," Petrosinelli said about
inflation. "Now people realize there’s a gorilla in the room."
    The cost of buying a home and more recently, surging U.S.
rental prices, are clear signs of rising inflation, not to
mention higher gasoline prices, he said.    
    "If people believe there's inflation, that's when inflation
is self-fulfilling," Petrosinelli said.
    Investors are looking to next week's auction of $24 billion
in 20-year bonds and $19 billion in five-year TIPS that the
Treasury announced on Thursday.
    The yield on the 30-year Treasury bond was up
2.7 basis points to 2.052%. 
    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 117.6 basis points. 
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was up 3.7 basis
points at 0.391%. 
    The 10-year TIPS breakeven rate was last at
2.556%, indicating the market sees inflation averaging almost
2.6% a year for the next decade.
    The U.S. dollar 5-year forward inflation-linked swap
, seen by some as a better gauge of inflation
expectations due to possible distortions caused by the Fed's
bond buying, was last at 2.553%.
    Oct. 15 Friday 1:32PM New York / 1732 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.0475       0.0482    0.002
 Six-month bills               0.0575       0.0583    0.000
 Two-year note                 99-186/256   0.3908    0.037
 Three-year note               99-216/256   0.6778    0.048
 Five-year note                98-228/256   1.1059    0.056
 Seven-year note               99-4/256     1.3991    0.055
 10-year note                  97-28/256    1.5685    0.049
 20-year bond                  95-176/256   2.0149    0.037
 30-year bond                  98-216/256   2.052     0.027
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        14.00         0.50    
 U.S. 3-year dollar swap        14.75         0.25    
 U.S. 5-year dollar swap         7.25        -0.25    
 U.S. 10-year dollar swap        0.75        -0.50    
 U.S. 30-year dollar swap      -23.50         1.00    
 spread (Reporting by Herbert Lash;
Editing by Alison Williams and Diane Craft)