U.S. Yields Gain For 2nd Day, As Markets Brace For Fed Hikes This Year – Reuters

NEW YORK, Jan 4 (Reuters) – U.S. Treasury yields for most maturities rose on the second trading session of the year on Tuesday, as bond investors geared up for interest rate hikes from the Federal Reserve by mid-year to curb stubbornly high inflation.

Yields on U.S. 5-year notes, which reflect rate hike expectations, soared to their highest since February 2020. U.S. 2-year note yields, another maturity that mirrors the market’s outlook for interest rates, hit their strongest level since March 2020 on Monday, before sliding 2 basis points on Tuesday to 0.7619% .

Benchmark 10-year yields, meanwhile, advanced to a six-week high, while 30-year yields climbed to their highest in more than two months.

“The move in Treasuries is a recognition that the Fed has moved up the tapering timeline and that they’re going to raise rates sooner than many people expected,” said David Petrosinelli, managing director and senior trader at broker-dealer InspereX in New York.

“The price pressures are not really going away. It’s not just supply chain. There’s a real shortage of labor and wage growth will continue to disappoint on the upside, which will force the Fed’s hand.”

Futures on the federal funds rate on Tuesday priced in a roughly 66% chance of a quarter percentage-point tightening by March, with investors fully pricing that scenario by May.

The U.S. yield curve, meanwhile, steepened, with the gap between 5-year and 30-yields at 72 basis points , the widest in more than a month. The U.S. 2-year/10-year yield curve was also steeper at 91.8 basis points , the widest in about five weeks.

“What this steepening means is that there is not a lot of conviction in the market that the Fed will raise rates so quickly that they will actually slow the economy, which would actually flatten the curve,” said Petrosinelli.

In afternoon trading, U.S. 5-year yields rose to as high as 1.3980% , their strongest level since February 2020, They were last flat on the day at 1.3687%.

The 10-year yield touched a six-week peak of 1.686% and was last up 3 basis points at 1.6612%.

U.S. 30-year yields rose to 2.103% , their highest since late October, and were last up 6 basis points at 2.0780%.

Market participants also said heavy corporate issuance continued to undermine Treasury prices, as companies looked to take advantage of historically low rates before the Fed raises them this year. Dealers underwriting the bond deals have to sell Treasuries to lock in the rate for borrowing costs.

About $11 billion in corporate bond offerings launched on Monday, weighing on Treasuries and pushing yields higher.

Deere, Nomura, UBS, Santander UK Group, American Electric Power, among others, also launched or announced corporate bond offerings, Action Economics said, adding to six financial companies that announced overnight.

Meanwhile, Tuesday’s data showing U.S. manufacturing slowing in December amid lackluster demand for goods briefly pushed yields lower. The Institute for Supply Management’s index of national factory activity fell to 58.7 last month, the lowest reading since last January and followed 61.1 in November. read more

The ISM data, however, was offset by a report which indicated that the number of Americans voluntarily quitting their jobs surged to a record 4.5 million in November, an indication that labor would cost employers a lot morethan before the pandemic. read more That should keep the Fed on track to raise rates multiple times this year.

January 4 Tuesday 3:21PM New York / 2021 GMT

Reporting by Gertrude Chavez-Dreyfuss; Editing by Susan Fenton and Nick Zieminski

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