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TREASURIES-Longer-term yields up as traders look for Fed inflation guidance

Credit: REUTERS/GARY CAMERON

Yields on longer-term U.S. Treasuries were higher Wednesday as traders anticipated that Federal Reserve comments would raise inflation expectations

By Ross Kerber

Aug 26 (Reuters) - Yields on longer-term U.S. Treasuries were higher Wednesday as traders anticipated that Federal Reserve comments would raise inflation expectations

The benchmark 10-year US10YT=RR yield was up about a basis point at 0.69% in afternoon trading, though off of a high of 0.721% reached in the morning before results of an auction of 5-year notes US5YT=RR showed continued strong demand.

Investors were betting that when he speaks on Thursday, Fed Chair Jerome Powell will create expectations of more inflation, said Jim Vogel, interest rate strategist for FHN Financial.

"People believe they will hear a broader view of how they (the Fed) will manage inflation targets, that suggests to many people that the curve will steepen and inflation expectations will continue to rise," Vogel said.

Powell and other Fed officials will speak at a virtual meeting traditionally held at the mountain resort of Jackson Hole, Wyoming. They are set to discuss the central bank's framework review to explore how monetary policy should adapt to changes in the economy.

Persistently low inflation and low interest rates have numbed the effects of the Fed's recession-fighting stimulus measures. Rising uncertainty about the economic outlook in the face of the coronavirus pandemic may add to pressure on the Fed to bolster its policy arsenal.

Wall Street advanced on Wednesday as upbeat earnings kept investors focused on momentum stocks that have outperformed since the onset of the coronavirus pandemic.

The U.S. Treasury sold $51 billion worth of 5-year notes at a high yield of 0.298%, with primary dealers accounting for 17.8% of accepted bids.

That was the lowest percentage since August of 2017 despite a spike in issuance, said Cantor Fitzgerald analyst Justin Lederer.

"There's still strong demand for Treasuries even in the midst of significantly increased auctions," he said.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes, US2US10=TWEB seen as an indicator of economic expectations, was at 53 basis points, roughly unchanged from Tuesday's close and well above its recent low of 33 basis points on July 24.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was unchanged at 0.1544%.

August 26 Wednesday 2:30PM New York / 1830 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

0.0975

0.0989

-0.002

Six-month bills US6MT=RR

0.11

0.1119

-0.005

Two-year note US2YT=RR

99-241/256

0.1544

0.000

Three-year note US3YT=RR

99-214/256

0.1805

0.000

Five-year note US5YT=RR

99-206/256

0.29

-0.002

Seven-year note US7YT=RR

99-60/256

0.4875

0.005

10-year note US10YT=RR

99-96/256

0.69

0.008

20-year bond US20YT=RR

98-184/256

1.1974

0.023

30-year bond US30YT=RR

99-36/256

1.4103

0.023

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

7.75

0.50

U.S. 3-year dollar swap spread

6.50

0.25

U.S. 5-year dollar swap spread

5.25

0.50

U.S. 10-year dollar swap spread

-0.50

0.25

U.S. 30-year dollar swap spread

-36.00

1.00

(Reporting by Ross Kerber in Boston; Editing by Will Dunham and David Gregorio)

((ross.kerber@thomsonreuters.com; (617) 856 4341; Reuters Messaging: Ross.Kerber.Reuters.com@Reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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