US Markets

TREASURIES-Yields soar as Fed to let inflation run hot

Credit: REUTERS/THOMAS WHITE

The yield on the U.S. 10-year Treasury note on Thursday rose above 1.75% for the first time in 14 months after the Federal Reserve pledged to look past inflation and keep interest rates near 0% until at least 2023, then ticked lower after the release of mixed economic data.

By Thyagaraju Adinarayan, Sujata Rao and Karen Pierog

March 18 (Reuters) - The yield on the U.S. 10-year Treasury note on Thursday rose above 1.75% for the first time in 14 months after the Federal Reserve pledged to look past inflation and keep interest rates near 0% until at least 2023, then ticked lower after the release of mixed economic data.

The jump in yields accelerated a move out of growth stocks with the tech-heavy Nasdaq falling more than 2%..N

The rate on the benchmark 10-year note US10YT=RR touched 1.7540%, which it had not seen since January 2020 before the coronavirus pandemic sent yields and stocks crashing. It was last at 1.7099%.

The yield on 30-year bonds reached 2.518%, its highest since August 2019. It was last at 2.4515%.

Yields eased a bit after the release of data showing the number of Americans filing for jobless benefits unexpectedly rose last week, while a separate report indicated the Philly Fed business index jumped more than expected to its highest level since 1973.

Jim Vogel, senior rates strategist, at FHN Financial in Memphis, Tennessee, said the market is "reacting totally in fear of the worst possible scenario: that inflation runs out of control and the Fed can't get it back."

"In effect that's a tail risk wagging the entire market at this point," he said.

Fed Chair Jerome Powell on Wednesday repeated pledges to hold interest rates steady in an effort to keep economic recovery on track even if inflation breached its 2% target this year.

At its two-day policy meeting this week, the Fed also upped economic growth forecasts to 6.5%, which would be the highest in almost 40 years, and predicted a fall in unemployment to 4.5% .

"The Fed has given a little bit of a green light to higher rates and the reason is pricing to reality, pricing to this stronger economic environment," said Tony Rodriguez, head of fixed income strategy at Nuveen.

He said the rollout of the coronavirus vaccine, the massive $1.9 trillion fiscal stimulus heading to taxpayers and others, as well as improving economic data no longer merit a 1% 10-year yield, which Nuveen projects should rise closer to 2% by year end.

Expectations are that the coronavirus relief package signed into law by President Joe Biden last week will boost economic growth and cause inflation to rebound.

The breakeven inflation rate on 10-year Treasury Inflation-Protected Securities (TIPS) climbed to 2.344%, the highest level since January 2014, following Thursday's $13 billion auction of the securities. It later slipped to around 2.306%. The TIPS yield rose as high as -0.549%. The offering resulted in a high yield of -0.580% and a bid-to-cover ratio, a gauge of demand, of 2.42 times.

"Typically a good auction for the inflation-protected market does lower rates in nearby securities, but not this time," Vogel said.

The U.S. central bank also said that starting Thursday it would increase the size of its daily reverse repurchases to $80 billion, from $30 billion, which would help put a floor under short end if record amounts of cash in circulation drives overnight borrowing costs to zero.

Three-month bills US3MT=RR were around 0.0152%, slipping to their lowest since last March, when the Fed lowered its fed funds target to 0.00% to 0.25%. One-month bills US1MT=RR traded as low as 0.0050% on Thursday.

Meanwhile, the U.S. Treasury announced auctions next week for $60 billion of two-year notes and $61 billion of five-year notes. A $62 billion offering of seven-year notes on March 25 comes after last month's disappointing auction in that maturity helped accelerate a move up in yields.

The two-year Treasury yield US2YT=RR, which typically moves in step with interest rate expectations, was 2.4 basis points higher at 0.1531%.

A closely watched part of the yield curve, which measures the gap between yields on two- and 10-year Treasury notes US2US10=RR, reached 160.15 basis points, the widest since July 2015. It was last up 4.74 basis points from Wednesday's close at 155.48 basis points.

March 18 Thursday 3:38PM New York / 2038 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

0.015

0.0152

-0.003

Six-month bills US6MT=RR

0.0325

0.033

-0.015

Two-year note US2YT=RR

99-242/256

0.1531

0.024

Three-year note US3YT=RR

99-200/256

0.3236

0.035

Five-year note US5YT=RR

98-76/256

0.8522

0.070

Seven-year note US7YT=RR

98-148/256

1.34

0.078

10-year note US10YT=RR

94-176/256

1.7099

0.069

20-year bond US20YT=RR

92-96/256

2.357

0.024

30-year bond US30YT=RR

87-212/256

2.4515

0.013

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

10.00

-1.25

U.S. 3-year dollar swap spread

10.25

-1.50

U.S. 5-year dollar swap spread

7.75

-2.50

U.S. 10-year dollar swap spread

-1.25

-2.25

U.S. 30-year dollar swap spread

-30.25

0.00

USThttps://tmsnrt.rs/3tysa7y

(Additional reporting by Elizabeth Howcroft, Saikat Chatterjee and Alden Bentley; editing by Kirsten Donovan and Jonathan Oatis)

((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))

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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