NEW YORK: Treasury yields rose on Friday in a volatile week rocked by a Bank of England intervention that sent bond prices soaring only to later slip after a raft of Federal Reserve officials insisted US interest rates will stay higher for longer.
A US Commerce Department report on Friday showed inflation running at a red-hot pace, providing the Fed little scope to ease a rate-hiking regime that has lifted US borrowing costs faster this year than at any time since the 1980s.
Excluding volatile food and energy, the personal consumption expenditures price index jumped 0.6% in August after being unchanged the prior month. The core PCE price index rose 4.9% on a year-on-year basis after rising 4.7% in July.The market is concerned about the pace of inflation and how fast it declines, said Andrzej Skiba, head of the BlueBay US fixed income team at RBC Global Asset Management.
“We need inflation coming down because in the absence of a meaningful move lower, the Fed will be unable to pivot policy and support markets even in the face of recession,” Skiba said.
At the end of a quarter when investors readjust portfolios, the PCE reading took back stage to a market in wait-and-see mode as it looks to the release of the US consumer price index on Oct. 13. The BoE’s unexpected move also is still being assessed.
“The market is still trying to make sense of the extent of collateral damage from the UK dislocation and any forced selling of assets and what that means for the broader risk complex,” Skiba said.
Just before the BoE’s intervention on Wednesday, the yield on the 10-year Treasury briefly shot to a 12-year high of 4.004%. But it later plunged that day more than 26 basis points to 3.707%, its biggest single-day drop since March 2009.
Rates have risen so fast the 10-year’s yield rose about 69 basis points in September, the biggest monthly gain since July 2003. Over the third quarter, the yield rose about 86 basis points, the largest quarterly rise since June 2009.
On Friday, the two-year’s yield, which typically moves in step with rate expectations, rose 8.8 basis points to 4.258%. The gap between two- and 10-year yields, a recession harbinger, eased back a bit to -43.9 basis points.
Fed Vice Chair Lael Brainard said the US central bank will need to maintain higher rates for some time and must guard against lowering them prematurely. She was the latest Fed official this week to hawk the high rate message.
“Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target,” she said in prepared remarks for a conference in New York.
The market and consumers too believe the Fed will be able to control inflation, but more important is how resilient can the consumer be as the economy slows, said Priya Mishra, head of global rates strategy at TD Securities.
“Our thought is that the consumer is going to slow down into year end and into next year and then it will become really tricky for the Fed,” Mishra said. “They are warning us of pain, but how much pain will they really tolerate, what is that threshold? The market is trying to figure that out.”
The Fed last week raised its median forecast for core PCE inflation to 4.5% this year from its previous estimate of 4.3% in June. Its estimate for core inflation in 2023 was boosted to 3.1% from the previously projected 2.7% in June.
The yield on 10-year Treasury notes rose 7.6 basis points to 3.823%, and the 30-year yield added 8.3 basis points to 3.776%.
The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.166%, the lowest rate since February 2021.
While data shows inflation still to high, the market has lowered its expectations.The 10-year TIPS breakeven rate was last at 2.146%, indicating the market now sees inflation averaging about 2.2% a year for the next decade. The rate has declined from more than 2.6% five weeks ago.
The US dollar five years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.176%.
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