U.S. yields climb as hawkish Fed concerns outweigh weaker economic data

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NEW YORK — U.S. Treasury yields

climbed on Monday as investors remained concerned the Federal

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Reserve would maintain its ultra hawkish stance on fighting

inflation despite economic data pointing to a slowdown in U.S.

business activity in October.

The Fed is widely expected to increase rates by 75 basis

points next week, but investors will be watching closely at any

indication from policymakers of a less aggressive approach

regarding future rate hikes.

“Their language on this issue will be very important with

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any softening in their tone likely boosting stocks and bonds and

hurting the dollar or more hawkish language having the opposite

effects,” David Kelly, chief global strategist at JPMorgan Asset

Management, said in a note on Monday.

The central bank has been shifting to a debate over how much

higher it can safely push borrowing costs, with San Francisco

Fed President Mary Daly saying on Friday it was time to start

talking about “stepping down” from rate hikes.

Speculation about a potentially more dovish Fed – despite

U.S. inflation remaining hot – was visible in money markets.

Fed funds futures traders on Monday were pricing in an

almost 100% probability of a 75 bps hike next week and about a

50% probability of another 75 bps increase in December. A week

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ago, the chance of a 75 bps December hike was seen at over 65%,

according to CME Group data.

Still, Treasuries – where yields move inversely to prices –

dropped on Monday, reversing earlier gains, as investors were

skeptical about a significant change in the Fed’s stance.

“There’s been a little bit of optimism coming from equities

as of late, so we have a maybe a little bit more of a risk-on

sentiment,” said Jake Jolly, Senior Investment Strategist at BNY

Mellon Investment Management. “But taking a step back, it’s hard

to see any material change and the macro outlook would suggest

that things haven’t changed much,” he added.

Yields dropped after an S&P Global survey on Monday which

showed U.S. business activity contracted for a fourth straight

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month in October, with manufacturers and services firms

reporting weaker client demand – the latest evidence of an

economy softening in the face of high inflation and rising

interest rates.

But they climbed back again, with the benchmark 10-year

Treasury yields up at 4.229% and two-year note

yields at 4.498%. On the long end, 30-year Treasury

yields rose to an 11-year high of 4.359%.

“If the Fed is going to be data dependent, these data points

should be a focus point for them. Whether or not that actually

happens, is yet to be seen,” said Matthew Miskin, co-chief

investment strategist at John Hancock Investment Management.

“The Fed is probably going to end up causing a policy

reversal, in time, but for now I think it is trying not to

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succumb to the weaker economic data,” he said.

Uncertainty around the Fed’s policies has been a major cause

of wild price swings this year, with many participants

complaining about deteriorating liquidity in the $24 trillion

U.S. government debt market.

Treasury Secretary Janet Yellen on Monday

acknowledged

that liquidity had diminished due to increased volatility,

but said it was not a source of financial instability.

October 24 Monday 3:00PM New York / 1900 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 3.9275 4.0198 0.028

Six-month bills 4.3525 4.5095 0.069

Two-year note 99-139/256 4.4982 0.007

Three-year note 99-68/256 4.5163 -0.017

Five-year note 98-254/256 4.3537 0.000

Seven-year note 97-122/256 4.2995 0.010

10-year note 88-56/256 4.2297 0.018

20-year bond 84-64/256 4.5942 0.024

30-year bond 77-112/256 4.3593 0.055

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 36.50 -1.25

spread

U.S. 3-year dollar swap 10.75 0.50

spread

U.S. 5-year dollar swap 3.00 0.00

spread

U.S. 10-year dollar swap 0.25 -0.25

spread

U.S. 30-year dollar swap -49.75 -2.25

spread

(Reporting by Davide Barbuscia, Editing by Angus MacSwan and

Chizu Nomiyama)