By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – U.S. Treasury yields advanced on Friday, bolstered by the gain in employment costs and consumer inflation for September that further stoked expectations of aggressive monetary policy action from the Federal Reserve to combat the surge in prices.
U.S. yield curves continued to flatten as investors priced in an interest rate hike by the Fed next year. The spread between U.S. 5-year and 30-year yields narrowed to 72.9 basis points, the tightest since late March 2020.
Another yield curve that showed the gap between U.S. 2-year and 10-year yields was also flatter on the day at 108.6 basis points.
Treasury yields extended their rise after data on U.S. labor costs increased by the most since 2001 as companies boosted wages and benefits amid a severe worker shortage. The employment cost index, the broadest measure of labor costs, surged 1.3% last quarter after rising 0.7% in the April-June period.
“This will surely contribute to the upward pressure on yields in the belly of the curve as it speaks to the risk that inflation becomes self-perpetuating,” wrote Ian Lyngen, head of U.S. rates strategy, at BMO Capital wrote in a research note after the data release.
Consumer price inflation also remained elevated.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, climbed 0.2% after gaining 0.3% in August. In the 12 months through September, the so-called core PCE price index increased 3.6% after a similar gain in August.
Following the data, futures on the fed funds rate, which track short-term rate expectations, have priced in a 90% chance of quarter-point tightening by June 2022, factoring in another rate increase by December.
In morning U.S. trading, the benchmark U.S. 10-year yield was up 2 basis points at 1.5925%.
U.S. 2-year yields backed off 19-month peaks, but were still higher on the day. It was last up 3 basis points at 0.5325%.
The U.S. 5-year yield, another part of the curve that is sensitive to Fed rate expectations, was up 4 basis points at 1.2317%.
The yield on U.S. 10-year Treasury Inflation Protected Securities (TIPS) also rose in tandem with nominal Treasuries. U.S. real yield hit a more than one-week high of -0.889% and was last at -0.938%. The 10-year annual breakeven rate dropped as a result to 2.54%.
Analysts attributed the surge in real yields to profit-taking ahead of a Fed taper that will include reducing purchases of TIPs.
In addition, investor buying of TIPS since late September has pushed real yield 30 basis points lower, which could well have prompted profit-taking as well.
The U.S. 20-year and 30-year yields remained inverted on Friday. U.S. 20-year yields were last up 2 basis points at 1.9986%, while those on the 30-year was down at 1.9589%.
Market participants said the yield inversion on the long end was due to technical factors, amid a backdrop of curve flattening around the world.
October 29 Friday 10:19AM New York / 1419 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.0525 0.0532 -0.003
Six-month bills 0.065 0.0659 0.003
Two-year note 99-180/256 0.5246 0.024
Three-year note 99-126/256 0.7993 0.027
Five-year note 99-130/256 1.2268 0.037
Seven-year note 99-76/256 1.4811 0.032
10-year note 97 1.582 0.013
20-year bond 96-8/256 1.9936 0.018
30-year bond 101-8/256 1.9541 -0.009
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 18.50 1.75
spread
U.S. 3-year dollar swap 19.25 1.75
spread
U.S. 5-year dollar swap 3.50 -1.25
spread
U.S. 10-year dollar swap -1.25 -2.00
spread
U.S. 30-year dollar swap -23.00 -1.50
spread
(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)
