US benchmark and short-dated Treasury yields hit over six-week highs on Tuesday on continued expectations of a December Federal Reserve interest rate hike, while surging corporate issuance contributed to long-dated yields touching six-week highs. Analysts said expectations for a December rate hike have risen since the US central bank put such a move firmly in play in a policy statement on October 28, and that Friday's US October employment report will likely be strong enough to bolster those expectations.
Economists expect US employers to have added 180,000 jobs last month according to a Reuters poll. The anticipation of a December hike led shorter-dated yields to extend their recent climb since those securities are deemed more vulnerable to the hikes, while benchmark yields also rose to over six-week highs. "Now that the probabilities of a December rate hike have increased in the minds of most investors, the front end of the curve is responding and rising in anticipation," said Michael Temple, portfolio manager at Pioneer Investments in Boston.
Yields on Treasuries maturing between two and 10 years hit their highest since September 17, with benchmark 10-year notes touching 2.2250 percent. Interest rate futures markets on Tuesday indicated a 52 percent probability of a Fed move in December, according to CME Group's FedWatch program. US 30-year Treasury yields, meanwhile, topped 3 percent for the first time in six weeks. Analysts said that recent corporate issuance has led traders to sell long-dated US government debt and favour similarly dated corporate bonds.
"Some of what we're seeing is simply preparation and setup for corporate deals," said David Coard, head of fixed-income sales and trading at Williams Capital in New York. He noted Arizona Public Service Company's issuance of $250 million in 30-year bonds Tuesday. In addition to corporate supply, Temple of Pioneer said higher inflation expectations drove 30-year yields higher. Investors' five-year inflation outlook in five years, or 5-year by 5-year forward inflation expectation rate, was 1.86 percent as of Friday, compared with 1.75 percent in late September which was its lowest since early 2009, according to the St. Louis Federal Reserve.
US two-year notes were last down 1/32 in price to yield 0.7698 percent after hitting a session high of 0.7780 percent and ending Monday at 0.7530 percent. US five-year notes were last down 4/32 to yield 1.5958 percent after hitting a session high of 1.6020 percent and ending Monday at 1.5640 percent.
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