NEW YORK: US Treasury yields rose sharply on Monday, with those on long-dated debt hitting multi-year highs, as investors prepared for a Federal Reserve meeting this week that is expected to raise interest rates by a hefty half a percentage point.
The Fed is also expected to launch quantitative tightening that will reduce the central bank’s more than $9 trillion balance sheet. Some Fed officials have said that the balance sheet run-off may start at the latest next month.
US benchmark 10-year yields traded not far from a psychologically important 3.0% level, hitting 2.992%, the highest since December 2018. US 10-year yields were last up 9 basis points at 2.978%.
US 30-year yields also climbed to multi-year peaks, rising to 3.053%, the highest since March 2019. The yield was last up 8 basis points at 3.024%.
“People are firming up their expectations coming out of the Fed meeting this week,” said Stan Shipley, fixed income strategist, at Evercore ISI in New York.
“We expect the Fed to be on the hawkish side with their comments. Even though commodity prices are going down, and even though there are signs that inflation pressures are easing, inflation is still high,” he added.
Fed funds futures, which track short-term rate expectations, have priced in at least three 50 basis-point increases this year, with 248 basis points in cumulative hikes.
By the end of 2022, the market has priced in a fed funds rate of 2.8%, compared with the current 0.33%.
On the short end of the curve, US 2-year yields, which tend to reflect Fed rate expectations, rose about 3 basis points to 2.729%.
On Monday, data showed US manufacturing activity slowed for a second straight month in April, but supply bottlenecks appeared to be easing, with the pace of increase in prices for inputs and the backlog of unfinished work at factories moderating.
The Institute for Supply Management (ISM) said on Monday that its index of national factory activity fell to a reading of 55.4 last month from 57.1 in March.
The US data, however, had marginal impact on Treasuries.
In other parts of the Treasury market, the yield on the US 10-year Treasury Inflation-Protected Securities (TIPS) turned positive again on Monday, hitting its highest since March 2020. It was last up 13 basis points at 0.07%.