Quantitative Easing

US two-year yield at nearly 15-year high before Fed meeting

US one dollar banknotes are seen in front of the stock market graph displayed in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration

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NEW YORK, Sept 20 (Reuters) – The yield on two-year U.S. Treasury bills, a proxy indicator of interest rate expectations, hit a 15-year high on Tuesday, a day before the Reserve federal government probably raises rates an additional 75 basis points to curb rising inflation.

The two-year is very sensitive to changes in monetary policy expectations and early Tuesday it hit 3.992%. The last time its return exceeded 4% was on October 18, 2007.

The Fed is expected to announce its latest policy decision on Wednesday. Money markets are fully pricing in a 75 basis point rate hike, with only an 18% chance of a larger full point rate hike, according to CME’s FedWatch tool.

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Sweden’s central bank earlier raised interest rates a full percentage point higher than expected to 1.75% and warned of further moves ahead as it also seeks to rein in the inflation. Read more

Yields on the benchmark 10-year Treasury jumped 11.1 basis points to 3.600%, rising above just 3.5% for the first time in 11 years on Monday. The two-year yield rose 4 basis points to 3.986%.

The 10-year moving higher and faster than the 2-year could simply position itself ahead of tomorrow’s Fed statement or it could be the Riksbank raising rates more than expected, said securities strategist Lawrence Gillum. fixed income at LPL Financial.

“What’s happening for the Fed and other central banks is there’s a push to accelerate these rate hikes,” Gillum said.

“There’s a lot of nervousness and pre-positioning building up for tomorrow’s meeting,” he said. “Foreign rates are rising, making our rates less attractive.”

The closely watched spread between two-year and 10-year yields had previously reached a discount of up to -47.5 basis points, approaching its most negative level since August 10, when the discount fell. widened to -56.2 basis points. The spread then narrowed to -39.0 basis points.

The reversal of two- and ten-year yields, when the short term is higher than the long term, has often been considered a reliable predictor of a recession in a year or two.

After Wednesday’s Fed statement, the market will try to gauge whether the U.S. central bank will raise rates by 50 basis points in November, said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.

“I don’t think they’re going to communicate that, but I think the market will try to price that in and if they do, then you might see some level of equilibrium in rates over the next few months,” he said. said Saglimbene.

“The terminal rate at which the Fed will stop raising interest rates is higher, and that terminal rate is likely to last longer,” he said. “All of this is centered on inflationary pressures that are more persistent.”

The 30-year Treasury bond yield rose 10.7 basis points to 3.612%.

The five-year US Treasury Inflation-Protected Securities (TIPS) break-even rate was last at 2.534%.

The 10-year TIPS break-even rate was last at 2.396%, indicating that the market expects inflation to average around 2.4% per year for the next decade.

The US dollar 5-year inflation-linked swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, last settled at 2.405%.

September 20 Tuesday 10:50 a.m. New York / 2:50 p.m. GMT

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Reporting by Herbert Lash, additional reporting by Samuel Indyk in London; Editing by Nick Zieminski

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