U.S. yields ease after hitting 3-1/2 year highs on rate hike jitters

© Reuters. FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

By Herbert Lash

NEW YORK (Reuters) -U.S. Treasury yields eased on Monday after the benchmark 10-year note hit fresh 3-1/2 year highs as inflation fears continued to roil markets and traders awaited consumer price data and the auction of $103 billion in new government debt later this week.

Ten-year Treasury yields fell 4.1 basis points to 3.083%, after hitting 3.203%, a level last seen in November 2018.

The equities rout will keep slamming bond sentiment until investors stop taking their cue from rising yields and turn to corporate earnings as their guide, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC.

“The correlation between stocks and bonds has to break down,” he said. “We have to get earnings numbers pulling the equity market down, or at least earnings numbers being slashed to validate the bearish sentiment that’s in the marketplace.”

The pause in the bond market sell-off was driven by short-covering and some bargain hunting, said Tom di Galoma, managing director at Seaport Global Holdings LLC.

Investors buy back borrowed securities to cover their short positions, which often sparks volatility. Sharply rising yields knock prices lower as yields move inversely to price.

The long end of the yield curve has been steepening, pushing the gap between two- and 30-year notes up from a low of 38.76 on Friday to a high of 61.87 on Monday, Refinitiv data showed.

“People are taking advantage of moving out the curve,” di Galoma said. “I’ve seen accounts extend from the very front end of the market to the long end just because the yield curve has steepened so much.”

Yields on Treasury debt have roughly doubled since early March when the Federal Reserve took a hawkish stance and began hiking interest rates for the first time since late 2018 to curb soaring inflation.

The Fed can stick to half-point rate hikes for the next two to three meetings, then assess how the economy and inflation are responding before deciding whether further rises are needed, Atlanta Fed President Raphael Bostic said.

“I don’t think we need to be moving even more aggressively,” Bostic told Bloomberg on Monday.

The U.S. consumer price index is expected to show on Wednesday that core CPI last month slowed to 6.0% and headline CPI to 8.1% from 6.5% and 8.5%, respectively, in March, according to economists polled by Refinitiv.

The Treasury will auction $45 billion of three-year notes on Tuesday, $36 billion of 10-year notes on Wednesday and $22 billion of 30-year notes on Thursday.

The spike in longer-dated bond yields has outpaced the short end of the curve, pushing the spread differential between two- and 10-year debt to its widest in nearly three months.

The closely watched gap between two- and 10-year yields , seen as an indicator of economic expectations, was at 45.2 basis points.

Yields on inflation-linked debt on U.S. bonds hit fresh multi-year highs, with yields on five-year maturities rising to their highest levels since March 2020.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.125%.

The 10-year TIPS breakeven rate was last at 2.798%, indicating the market sees inflation averaging about 2.8% a year for the next decade.

May 9 Monday 2:34 PM New York / 1834 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 0.82 0.833 -0.015

Six-month bills 1.3225 1.3496 -0.010

Two-year note 99-193/256 2.6286 -0.067

Three-year note 99-98/256 2.8455 -0.068

Five-year note 98-232/256 2.9882 -0.058

Seven-year note 98-184/256 3.0805 -0.051

10-year note 89-224/256 3.0832 -0.041

20-year bond 84-212/256 3.4389 -0.012

30-year bond 81-152/256 3.2152 -0.006

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 29.25 -2.50

spread

U.S. 3-year dollar swap 15.50 -2.75

spread

U.S. 5-year dollar swap 5.25 -2.00

spread

U.S. 10-year dollar swap 4.50 -1.25

spread

U.S. 30-year dollar swap -28.75 -2.25

spread