U.S. Treasury yields hit 10 - year inflation forecast

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U.S. Treasury yields hit 10 - year inflation forecast

Unexpected rise in retail sales adds to inflation fears Five-year breakeven inflation rate highest since April 2005 Adds details on the two-year bond yield By Herbert Lash NEW YORK, Oct 15 Reuters - Treasury yields rose and a market indication of inflation expectations hit the highest since 2005 on Friday as an unexpected increase in U.S. retail sales in September added to bearish bond sentiment about the path of interest rates. The yield on benchmark 10 year notes rose by 5.5 basis points to 1.574% amid fears that supply constraints, as seen in shortages of motor vehicles and other goods could disrupt the holiday shopping season. Retail sales rose 0.7% last month and data for August was revised higher to show retail sales increased 0.9% instead of 0.7% as originally reported by the Commerce Department. September sales were partly lifted by higher prices. There is an overwhelming bearishness in the market from a lot of hedge funds and big macro accounts that think rates are going to go up another 50 basis points by year-end or early next year, said Tom di Galoma, Managing Director at Seaport Global Holdings in Greenwich, Connecticut. The Federal Reserve will likely begin to taper its massive bond purchases in December, but will hold off on increasing the federal funds rate for the moment, di Galoma said. The breakeven rate on five-year U.S. Treasury Insurance-Protected Securities TIPS was last at 2.735% after earlier hitting 2.753%, the highest since April 2005. The two-year U.S. Treasury yield rose to 0.403%, its highest since March 2020, suggesting investors are pricing in a more aggressive rate hike by the Fed than previously expected The Fed's insistence that higher consumer prices are transitory has been thoroughly debunked by now, said David Petrosinelli, senior trader at InspereX. The gorilla has been in the room for a long time, but maybe the gorilla was a little too quiet, Petrosinelli said about inflation. Now they realize there is a gorilla in the room. The cost of buying a home and more recently, rising rental prices are clear signs of rising inflation, not to mention higher gasoline prices, he said. If people believe there is inflation, that's when inflation is true, Petrosinelli said. Investors are looking forward to next week's auction of $24 billion in 5-year Treasury notes and $19 billion in 20-year TIPS announced by the Treasury on Thursday. The yield on the 30-year Treasury Bond stood at 2.046%. A closely watched section of the U.S. Treasury yield curve measuring the gap between yields on two and 10 year note, known as an indicator of economic expectations, was at 117.7 basis points. The 10 year TIPS breakeven rate was last at 2.562%, indicating the market sees inflation averaging almost 2.6% a year for the next decade. The U.S. dollar 5 year forward inflation linked swap seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's bond buying was last at 2.560%.