NEW YORK: US Treasury yields were mixed on Friday, with some maturities pulling back from highs, as selling eased amid uncertainty surrounding the timing of the Federal Reserve's first interest rate hike since December 2018 and the number of such increases.
Fed policymakers are also expected to announce plans to begin tapering the central bank's $120 billion in monthly purchases of Treasuries and mortgage-backed securities at the end of their two-day meeting next week.
The market, though, has been more focused on the tightening that follows the taper. "Treasuries will be sensitive to any Fed concerns about high inflation readings, which could bring an earlier start to the hiking cycle," TD Securities wrote in its latest research note.
Friday's data showing a gain in employment costs and consumer inflation for September fanned worries that the Fed could take aggressive policy action to combat the surge in prices.
The US employment cost index, the broadest measure of labor costs, grew the most since 2001 as companies boosted wages and benefits amid a severe worker shortage. The index surged 1.3% last quarter after rising 0.7% in the April-June period
Consumer price inflation also remained elevated. The personal consumption expenditures (PCE) price index, excluding food and energy components, climbed 0.2% after gaining 0.3% in August. In the 12 months through September, the so-called core PCE price index increased 3.6%, little changed from August.
Following the data, fed funds futures have fully priced in a quarter-point tightening by July 2022 and another rate increase by December. Wells Fargo, though, does not agree with the rate futures market, instead calling for the first hike in mid-2023.
Zach Griffiths, macro strategist at Wells Fargo, expects a sharp inflation pullback in 2023 to more typical levels: a range in the high 1%'s or right around 2% in the consumer price index or the core PCE. "If the Fed sees that as well, we think they could tolerate higher inflation over an extended time frame based on a new framework," he added.
US yield curves, meanwhile, continued to flatten as investors priced in a Fed hike next year. The spread between US 5-year and 30-year yields narrowed to 72.9 basis points, the tightest since late March 2020. It was last at 75 basis points. In afternoon US trading, the benchmark US 10-year yield was down 1 basis point at 1.5574%. On the week, the 10-year yield was down 8 basis points, the largest weekly drop since early July.
US 2-year yields backed off Thursday's 19-month peaks to trade down less than a basis point at 0.4911%. The yield rose 21 basis points this month, its largest monthly gain since April 2018. The US 5-year yield, another part of the curve that is sensitive to Fed rate expectations, was flat at 1.1896% . It rose 20 basis points this month, the steepest gain since February 2021.