Yields rise as investors focus on further rate hikes



By Karen Brettell

NEW YORK, Aug 11 (Reuters) - Benchmark U.S. Treasury yields hit a more than two-week high on Thursday as investors bet the U.S. Federal Reserve will press on hiking rates as inflation remains high, even though price pressures are showing signs of abating.

Data on Thursday showed U.S. producer prices unexpectedly fell in July. It came a day after news that the Consumer Price Index (CPI) for July was unchanged on the month, but up at an annual rate of 8.5%.

"Even if they're seeing slowing inflation and a slowing of the economy, they will still hike rates. Why? Because inflation still has an 8% handle on it. It's still far too high," said Padhraic Garvey, regional head of research, Americas at ING.

Markets have been whipsawed as expectations change on whether the U.S. central bank is likely to raise rates by 50 basis points or 75 basis points at its September meeting.

The odds of a 75 basis points hike dropped on Wednesday following U.S. consumer price data. They had increased after Friday's jobs report for July showed U.S. job growth had unexpectedly accelerated.

Fed funds futures traders are now pricing in a 58% chance of a 50-basis-point hike in September and a 42% chance of a 75-basis-point increase. FEDWATCH

The fed funds rate is expected to rise to 3.65% by March, from 2.33% now. USONFFE=

The Fed may want to raise rates another 75 basis points as it would be more difficult to hike once the economy slows, said Tom di Galoma, managing director at Seaport Global Holdings, noting that inflation remains "quite high."

"I think the Fed wants to increase rates as quickly as they can so they can lower them once the slowdown takes place," di Galoma said. "The yield curve doesn't invert like this unless there is going to be a fairly broad recession coming."

Concerns that the Fed's tightening will spark an economic slowdown have sent yields on longer-dated debt below those on shorter-dated notes.

The closely watched yield curve between two- and 10-year notes US2US10=TWEB was at minus 35 basis points on Thursday, after reaching minus 56 basis points on Wednesday, the deepest inversion since 2000.

An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12-to-18 months.

Benchmark 10-year note yields US10YT=RR reached 2.902% on Thursday, the highest since July 22. Two-year note yields US2YT=RR rose two basis points to 3.229%.

Long-dated yields also rose on Thursday on soft demand for a $21 billion sale of new 30-year bonds, the final sale of $98 billion in new coupon-bearing supply this week.

The bonds sold at a high yield of 3.106%, more than a basis point higher than before the auction. Demand was 2.31 times the debt on offer, the weakest ratio since April. USAUCTION28

The 30-year bond yields US30YT=RR rose to 3.189% in the secondary market, the highest since July 21.

Demand was solid for a $35 billion sale of 10-year notes on Wednesday and a $42 billion sale of three-year notes on Tuesday.

August 11 Thursday 3:00PM New York / 1900 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.5075

2.5584

-0.039 Six-month bills US6MT=RR

2.9575

3.0438

-0.011 Two-year note US2YT=RR

99-145/256 3.2289

0.015 Three-year note US3YT=RR

99-218/256 3.1773

0.030 Five-year note US5YT=RR

98-234/256 2.9867

0.065 Seven-year note US7YT=RR

97-248/256 2.9496

0.090 10-year note US10YT=RR

98-212/256 2.8857

0.105 20-year bond US20YT=RR

97-240/256 3.3939

0.115 30-year bond US30YT=RR

94-76/256

3.1724

0.130

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

29.25

2.25

spread

U.S. 3-year dollar swap

11.00

1.50

spread

U.S. 5-year dollar swap

4.00

0.75

spread

U.S. 10-year dollar swap

5.00

0.50

spread

U.S. 30-year dollar swap

-31.50

-0.25

spread



U.S. retail sales unexpectedly fall in May

Americans feel the heat as U.S. annual inflation posts largest gain since 1981



Reporting by Karen Brettell; Editing by Susan Fenton and Richard Chang

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.