Treasury yields jump as central banks tighten their outlook

By Herbert Lash

NEW YORK, Sept 23 - U.S. Treasury yields jumped on Thursday after the Federal Reserve opened the door to raising interest rates as early as next year, a potential move that was reinforced by the Bank of England's outlook on rates and a rate hike by the Norwegian central bank.

Yields on the benchmark 10-year Treasury note US10YT=RR shot above 1.4% to their highest since mid-July as selling pressure on UK gilts spilled into the Treasury market after the tightening message from the European central banks.

The sudden move higher in yields surprised the market after the muted reaction to the Fed's hawkish stance on Wednesday. The U.S. central bank said it would reduce its monthly bond purchases "soon" and half of the Fed's policymakers projected borrowing costs will need to rise in 2022.

"The central banks are starting to finally get the message that they actually need to tighten. The pandemic's basically over," said Tom di Galoma, managing director of Seaport Global Holdings in Greenwich, Connecticut.

Bond prices, which move opposite to their yield, plunged in afternoon trading and tripped sell stops, said Kim Rupert, managing director, fixed income at Action Economics in San Francisco.

The hawkish shift among Fed policymakers, similar signs by other central banks and the risk rally in stocks weighed heavily on Treasuries, she said.

Treasury's announcement of $183 billion shorter-dated coupon auctions for next week, unchanged in size so far this year, also weighed, she said.

"Take a step back and just think about how low yields are even relative to where we were in the first quarter of this year," said Zachary Griffiths, macro strategist at Wells Fargo in Charlotte, North Carolina. "We do have very high inflation, high economic growth forecasts and it's really been kind of hard to justify where yields have been up to this point."

The BofE said the case for higher rates "appeared to have strengthened," leading interest rate futures to price in a 90% chance that the British central bank would raise rates by February. Short-dated British government bond yields soared to their highest since the market turmoil of March 2020.

Norges Bank raised its benchmark interest rate to 0.25% from zero and expects to hike again in December, saying a strong recovery in the Norwegian economy made it time to start a gradual normalization of monetary policies. It became the first major central bank to tighten policy since the COVID-19 crisis began.

European Central Bank policymakers, meanwhile, are bracing for inflation to exceed the bank's already-raised estimates, paving the way to end its emergency bond purchases in March, sources involved in the discussion said.

"Accounts are looking at this move in UK gilts, which is causing a lot of the selling in Europe," di Galoma said. "Accounts are sensing that rates are going to head higher in the fall, and they're trying to get in front of it."

The yield on benchmark 10-year U.S. Treasury notes US10YT=RR rose 8.4 basis points to 1.415%, while the 30-year Treasury note US30YT=RR topped 1.93%, before retreating a bit.

The Fed's reverse repo facility, which provides approved money managers the option to lend money overnight to the U.S. central bank in return for Treasury collateral, set a fresh record $1.352 trillion, or $128 billion more than on Monday. Borrowing rates remained at 5 basis points.

The five-year note rose above 90 basis points for the first time since early July, with the target on five-year notes now around 1% and more repricing likely in store as the market assesses Fed Chair Jerome Powell's hawkish stance as he's considered dovish, di Galoma said.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR , seen as an indicator of economic expectations, was at 115.4 basis points.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 1.9 basis points at 0.259%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 2.489%.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.328%, indicating the market sees inflation averaging about 2.33% a year for the next decade.

The Treasury auction of $14 billion in 10-year TIPS was strong, with a high yield of -0.939% versus a six-auction average of -0.870%, according to BMO Capital Markets.

September 23 Thursday 3:51PM New York / 1951 GMT


Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.03


0.000 Six-month bills US6MT=RR



0.000 Two-year note US2YT=RR



0.019 Three-year note US3YT=RR



0.032 Five-year note US5YT=RR



0.063 Seven-year note US7YT=RR



0.077 10-year note US10YT=RR



0.084 20-year bond US20YT=RR



0.083 30-year bond US30YT=RR





Last (bps)




U.S. 2-year dollar swap




U.S. 3-year dollar swap




U.S. 5-year dollar swap




U.S. 10-year dollar swap




U.S. 30-year dollar swap




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Reporting by Herbert Lash in New York, additional reporting by Gertrude
Chavez-Dreyfuss in New York and Karen Pierog in Chicago; Editing by Matthew
Lewis, Nick Zieminski and Diane Craft

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