Longer-dated US Treasury yields rose sharply on Friday with 30-year bond yields reaching a four-month high after the release of solid US and Chinese economic data and comments from Federal Reserve Chair Janet Yellen, who suggested the central bank may allow inflation to exceed its 2 percent target. The Treasury yield curve steepened with two-year yields touching a more than one-week low as investors continued to bet on a near-term Fed interest rate increase and a slower pace for future ones.
Yellen said at a conference of policymakers and top academics that the Fed may need to run a "high-pressure" economy to reverse damage from the Great Recession. The spread between 5- and 30-year Treasuries rose after the release of Yellen's remarks to more than 127 basis points, the widest since September 16.
"The big one is the comment about running the economy hot," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank. "Maybe she is preparing for a December rate hike, but she doesn't want the market to run ahead of her ... She doesn't mind more inflation that's why the US yield curve is steepening." Earlier on Friday, China reported higher than-expected inflation in September for consumers and producers alike, with producer prices rising for the first time since January 2012. "China giveth and China taketh away," said Lou Brien, market strategist at DRW Trading in Chicago. "This being the Halloween season, the markets are almost looking for something to spook them."
Benchmark 10-year Treasury notes were last down 15/32 in price to yield 1.791 percent. The 30-year bond fell 1-17/32 in price to yield 2.552 percent, the highest since June 23. Yields on the 30-year bond were on track for the largest one-day gain in five weeks. Yields on the 2-year Treasury note fell to 0.819 percent, the lowest since October 5, after Yellen's comments.
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