Long-term US yields drop to one-week low; 2-year note auctions well received – Markets
NEW YORK: US Treasury yields were mixed on Tuesday in low volume, with those on the long end of the curve falling for a third straight session, as investors looked to next week’s Federal Reserve meeting for get clues about the timing of its first interest rate hike. since December 2018.
The 10-year, 20-year and 30-year US Treasury yields all fell to their lowest levels within a week.
A strong 2-year ticket auction in the US, meanwhile, did not increase bids for the short end of the curve as prices remained lower. The auction posted a high yield of 0.481 pc, lower than the expected rate on the submission deadline, suggesting that investors accepted a lower premium for the note.
The bid-to-cover ratio, an indicator of demand, was 2.69, compared to an average of 2.50.
A slew of better-than-expected US data pushed up short-term bond yields, flattening the curve, as investors factored in the Fed’s rate hikes sooner rather than later. The spread between US 5-year bonds and 30-year bonds narrowed to 86.9 basis points.
US yields extend their rise after a moderate 20-year auction; the curve is accentuated for the 2nd day
Data on Tuesday showed that U.S. consumer confidence rose unexpectedly in October, as concerns over high inflation were offset by improving labor market prospects. New home sales in the United States also jumped, up 14% in September.
“I think what is happening is that rate hike fears are being addressed on the US front end at an accelerated pace,” said Steve Feiss, Managing Director, Fixed Income, at broker Etico Partners.
Rising inflation in the United States further fueled the Fed’s rate hikes earlier than expected.
The US 5-year breakeven inflation rate, which reflects inflation expectations over the next five years, took another step on Tuesday, reaching 2.985 percent, the highest since at least January 2004.
The 10-year break-even rate also reached a milestone, reaching 2.695 pc, its highest level since May 2006.
Fed funds futures forecast a 70% chance of a June rate hike on Tuesday, although the decline in U.S. central bank asset purchases, if it starts in November, could also end in June.
Overall, rate futures traders are also betting on two rate hikes next year, with the second taking place in December. In afternoon US trading, the US 10-year benchmark yield fell almost 2 basis points to 1.6185 pc.
The US 5-year yield, which reflects the Fed tightening, rose half a basis point to 1.1828 bp. It hit an eight-month high of 1.193 bp last week.
US 30-year yields fell 3 basis points to 2.0506 bp.
Jim Vogel, senior rate strategist at FHN Financial, said volume was low for a third straight session on Tuesday, adding that the longer it goes, “the direction of the next big move will gain technical significance.”