TREASURIES-U.S. yields shoot higher after Powell sets hawkish tone

Credit: REUTERS/PHILIMON BULAWAYO

By Herbert Lash

NEW YORK, Nov 3 (Reuters) - Treasury yields jumped on Thursday, with the two-year note climbing toward 5%, a day after Federal Reserve Chairman Jerome Powell said the "ultimate level" of the U.S. central bank's policy rate would likely be higher than previously estimated.

The Fed on Wednesday raised interest rates by 75 basis points, as expected, to push its target range to 3.75%-4.0%. Bond and equity markets immediately sold off on the hawkish stance, and remained under pressure on Thursday.

Those hoping for the Fed to signal a more dovish tone were stung by Powell's message that rates would stay higher for longer to battle inflation that in the United States remains above 8% annually with few signs yet of cooling off.

"If we don't see 7.5% by year end, a lowish 7.3% or 7.4% print, somewhere in that range, the Fed will start to feel they need to be more aggressive next year with the rate hikes," said Dec Mullarkey, managing director at SLC Management in Boston.

"Powell is telling everyone we're focused on inflation here, we need to see that come down," he said. "People don't know how lethal inflation can be if you don't get it under control."

Powell's message was there's still a lot of rate hiking left to do, which is the reason why there's still further selling pressure in the bond market, said Kevin Flanagan, head of fixed income strategy at WisdomTree.

"The Fed is entering the new phase of this rate hike cycle, where 75, 75, banging you over the head isn't needed anymore," he said, referring to the four consecutive rates hikes of 75 bps each at the past four meetings of Fed policymakers.

Fed fund futures lifted expectations for the Fed's terminal rate to 5.147% in June 2023, with the market now calling for that rate to be above 5% for the five Fed meetings next year from March through September. Before Wednesday, futures had barely breached 5%, and only in one month. FEDWATCH

Gennadiy Goldberg, senior rates strategist at TD Securities, said the Fed will have to tighten policy quite a bit further, which is why the terminal rate will likely hit 5.5% in May 2023.

"This should push front-end rates higher, keep the curve flat (inverted) as the market pencils in more cuts, and likely keep long-end rates under some downward pressure as the market starts to pencil in a harder landing ahead," Goldberg told the Reuters Global Markets Forum.

The yield on the benchmark 10-year note US10YT=RR rose 6.9 basis points to 4.130%, while the two-year US2YT=RR yield, which typically moves in step with interest rate expectations, shot up 14 basis points to a fresh 15-year high of 4.710%.

Before June, the two-year yield had never breached 3% in 14 years and had spent most of that time well below 1.5%.

The yield spread between two- and 10-year notes US2US10=RR, seen as a recession harbinger when the shorter-dated yield inverts and is higher than the back end, was at -58.2 basis points, the lowest since May 2000.

The yield on the 30-year Treasury bond US30YT=RR was up 4.1 basis points to 4.165%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 2.549%.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.404%, indicating the market sees inflation averaging less than 2.5%% a year for the next decade.

The U.S. dollar five years forward inflation-linked swap USIL5YF5Y=R, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.495%.

Nov. 3 Thursday 3:55 PM New York / 1955 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

4.035

4.1327

-0.005

Six-month bills US6MT=RR

4.435

4.5991

-0.006

Two-year note US2YT=RR

99-95/256

4.7097

0.140

Three-year note US3YT=RR

98-240/256

4.6393

0.135

Five-year note US5YT=RR

98-246/256

4.3589

0.108

Seven-year note US7YT=RR

98-118/256

4.2568

0.096

10-year note US10YT=RR

88-252/256

4.1301

0.069

20-year bond US20YT=RR

86-40/256

4.4329

0.032

30-year bond US30YT=RR

80-56/256

4.1651

0.041

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

37.25

-1.75

U.S. 3-year dollar swap spread

15.25

-1.75

U.S. 5-year dollar swap spread

8.25

-1.25

U.S. 10-year dollar swap spread

4.00

-1.50

U.S. 30-year dollar swap spread

-45.25

-1.00

The race to raise rates The race to raise rateshttps://tmsnrt.rs/3sUQpi0

(Reporting by Herbert Lash, additional reporting by Lisa Pauline Mattackal in Bengaluru; Editing by Kirsten Donovan, Nick Zieminski, William Maclean)

((herb.lash@thomsonreuters.com; 1-646-223-6019; Reuters Messaging: herb.lash.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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