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Bonds News

TREASURIES-Yields little changed as Fed officials vow to fight hot inflation

 (Adds comment, refreshes prices)
    By Herbert Lash
       NEW YORK, Sept 30 (Reuters) - U.S. Treasury yields were
little changed on Friday after a volatile week rocked by a Bank
of England intervention that sent bond prices soaring only to
later slip as Federal Reserve officials reiterated interest
rates would stay higher for longer.
    A U.S. Commerce Department report on Friday showed inflation
running at a red-hot pace, providing the Fed little reason to
ease a rate-hiking regime that has lifted U.S. borrowing costs
faster this year than at any time since the 1980s.
        Excluding volatile food and energy, the personal
consumption expenditures price index jumped 0.6% in August after
being unchanged the prior month. The core PCE price index rose
4.9% on a year-on-year basis after rising 4.7% in July.

  
        The market is concerned about the pace of inflation and
how fast it declines, said Andrzej Skiba, head of the BlueBay US
fixed income team at RBC Global Asset Management. 
  
        "We need inflation coming down because in the absence of
a meaningful move lower, the Fed will be unable to pivot policy
and support markets even in the face of recession," Skiba said.
  
        At the end of a quarter when investors readjust
portfolios,    the PCE reading got a bit lost and the market
entered a wait-and-see mode as it looks to data on U.S. consumer
prices on Oct. 13.
  
        "The market is still trying to make sense of the extent
of collateral damage from the UK dislocation and any forced
selling of assets and what that means for the broader risk
complex," Skiba said.
  
        Just before the BoE's intervention on Wednesday, the
yield on the 10-year Treasury briefly hit a 12-year high of
4.004%. But it later plunged that day more than 26 basis points
to 3.707%, its biggest single-day drop since March 2009. 
  
        On Friday, the two-year's yield, which
typically moves in step with rate expectations, 
    fell 0.5 basis points
     to 
    4.165
    %. The gap between two- and 10-year yields, a
recession harbinger, eased back a bit to 
    -40.9
     basis points.
  
    Fed Vice Chair Lael Brainard said on Friday the U.S. central
bank will need to maintain higher rates for some time and must
guard against lowering them prematurely.
    "Monetary policy will need to be restrictive for some time
to have confidence that inflation is moving back to target. For
these reasons, we are committed to avoiding pulling back
prematurely," she said in prepared remarks for a conference in
New York.
    The Fed last week raised its median forecast for core PCE
inflation to 4.5% this year from its previous estimate of 4.3%
in June. Its estimate for core inflation in 2023 was boosted to
3.1% from the previously projected 2.7% in June.
    The yield on 10-year Treasury notes rose 1.1
basis points to 3.758%, and the 30-year yield added
3.6 basis points to 3.729%. 
        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.186%.
    The 10-year TIPS breakeven rate was last at
2.141%, indicating the market sees inflation averaging about
2.1% a year for the next decade. The rate has declined from more
than 2.6% it showed five weeks ago.
    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 2.170%.
     Sept. 30 Friday 1:53 PM New York / 1753 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             3.2475       3.3186    0.005
 Six-month bills                               3.8075       3.9345    0.020
 Two-year note                                 100-41/256   4.1652    -0.005
 Three-year note                               98-24/256    4.193     0.005
 Five-year note                                100-158/256  3.9873    0.008
 Seven-year note                               99-226/256   3.8943    0.011
 10-year note                                  91-192/256   3.7582    0.011
 20-year bond                                  91-28/256    4.0293    0.030
 30-year bond                                  86-240/256   3.7287    0.036
                                                                      
   DOLLAR SWAP SPREADS                                                
                                               Last (bps)   Net       
                                                            Change    
                                                            (bps)     
 U.S. 2-year dollar swap spread                 28.50         0.00    
 U.S. 3-year dollar swap spread                  6.75         0.00    
 U.S. 5-year dollar swap spread                  5.25         0.75    
 U.S. 10-year dollar swap spread                 4.75         0.50    
 U.S. 30-year dollar swap spread               -41.50         1.00    
                                                                      
 (Reporting by Herbert Lash; Editing by Jonathan Oatis and
Andrea Ricci)
  
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