Quantitative Easing

CASH-US Yields Rise As Market Waits For Fed Cut

By Herbert Lash NEW YORK, October 21 (Reuters) – US Treasury yields rose on Thursday as a rapidly recovering economy renewed questions about when the Federal Reserve will raise interest rates after it finishes cutting its massive bond buying program. The 10-year Treasury bill yield rose 3.9 basis points to 1.675% after breakeven inflation on 10-year TIPS hit a nine-year high of 2.614% earlier in the session . The number of Americans filing new jobless claims fell to a 19-month low last week, indicating a tightening labor market. Market participants are reassessing their outlook on monetary policy as primary dealers complete the Fed’s survey of their market expectations, said Steven Ricchiuto, chief US economist at Mizuho Securities USA LLC. People fear the tightening process will start sooner than Fed policymakers are now suggesting, especially with wages and inflation rising, Ricchiuto said. “Is it this back and forth between inflation that is really higher? Does it come down to prices and then wages and what does that imply for future inflation?” he declared. “At the same time, what does that imply for monetary policy and that is the bribe.” Demand for shorter-dated TIPS provides context on concerns about higher near-term prices, BMO Capital Markets said. A five-year $ 19 billion TIPS auction on Thursday will be the first since June, when stimulus trading recently peaked, BMO said in a note. Data on investor class showed that a remarkable 85% of the offering then went to domestic investment funds, a clear indication of this investor base’s willingness to bid aggressively for protection against short-term inflation, BMO said. The yield on 30-year Treasuries rose 2.7 basis points to 2.138%. A closely watched portion of the U.S. Treasury yield curve measuring the spread between two-year and ten-year Treasury bill yields, seen as an indicator of economic expectations, was 125.7 basis points. The two-year US Treasury yield, which generally moves in line with interest rate expectations, rose 4.1 basis points to 0.416%. The breakeven rate on inflation-protected five-year US Treasury securities (TIPS) was the latest at 2.834%. The 10-year TIPS break-even rate was the latest at 2.623%, indicating that the market is forecasting average inflation of around 2.6% per year for the next decade. The 5-year US dollar inflation-linked forward swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was the latest at 2.563%. Oct 21 Thursday 10:58 am New York / 1458 GMT Price Current net yield% Change (bp) Three-month bills 0.0525 0.0532 -0.003 Six-month bills 0.0575 0.0583 0.002 Two-year note 99-174 / 256 0.416 0.041 Three years Note 99-158 / 256 0.7551 0.053 Five years Note 98-114 / 256 1.2001 0.053 Seven years Note 98-86 / 256 1.5034 0.049 10 years Note 96-44 / 256 1.6745 0.039 20-year bond 94-44 / 256 2.1114 0.030 30-year bond 96-244 / 256 2.1387 0.028 SPREADS DOLLAR SWAP Last (bps) Net change (bps) 2-year US dollar swap 17.75 0.75 spread 3-year US dollar swap 14.75 0.25 spread 5-year US dollar swap 7.00 0.00 spread 10-year US dollar swap 0.75 0.00 spread 30-year US dollar swap -22.75 spread 0. 25 (Report by Herbert Lash, edited by Nick Zieminski)

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