Yields ease before Fed on Russia war concerns

1 month ago

By Karen Brettell NEW YORK, Sept 21 (Reuters) – Benchmark 10-year yields eased from 11-year highs on Wednesday before the Federal Reserve is expected to hike interest rates by an additional 75 basis points as concerns about an escalation of the war between Russia and Ukraine modestly boosted demand for the debt.

Yields have increased this week as investors bet that the Fed will adopt a more hawkish tone and signal that it plans to keep rates high, and monetary policy restrictive, as it battles persistent inflation that is close to 40-year highs. They gave back some of this increase on Wednesday, however, after Russian President Vladimir Putin called up 300,000 reservists to fight in Ukraine and backed a plan to annex parts of the country, hinting to the West he was prepared to use nuclear weapons to defend Russia.

Putin´s comments were seen adding a slight bid to Treasuries, but were seen as unlikely to dramatically alter market positions before the Fed concludes its two-day meeting on Wednesday. “It’s partly why we´re seeing the market trade a little bit better today, ” said Thomas Simons, a money market economist at Jefferies in New York.

However “it´s hard to see the market really rally a lot more from here ahead of the FOMC.” Fed Chairman Jerome Powell is expected to maintain that the U.S. central bank remains committed to hiking rates even if growth starts to waver. “He´s really trying everything he can to make sure that the market understands his commitment to bringing inflation down and this idea that they´re not going to take their foot off the gas at the first sign that the economy is weakening,” said Simons.

Traders are pricing in a 19% chance of a 100 basis points increase on Wednesday, though that may be even less likely following the Russia news. “In light of the risk-off backdrop created by the Kremlin´s announcement, it´s difficult to envision an outsized bearish response to the FOMC´s decision; at least not in the long end of the curve. If nothing else, the escalation of geopolitical tensions takes 100 bp off the table; although we´re skeptical it was ever under serious consideration,” BMO Capital Markets interest rate strategists Ian Lyngen and Benjamin Jeffery said in a report.

Benchmark 10-year note yields were last at 3.542%, after reaching 3.604% on Tuesday, the highest since April 2011. Two-year yields were at 3.965%, after hitting 3.992% on Tuesday, the highest since October 2007. The closely watched yield curve between two-year and 10-year yields was at minus 43 basis points.

Real yields, MINIBOLA which adjust for expected inflation, also dipped on Wednesday. Five-year yields on Treasury Inflation-Protected Securities (TIPS) fell to 1.269%, from a high of a 1.323% on Tuesday, which was the highest since August 2009. 10-year TIPS yields fell to 1.148%, from 1.219% on Tuesday, the highest since February 2011.

September 21 Wednesday 9:29AM New York / 1329 GMT Price Current Net Yield % Change (bps) Three-month bills 3.26 3.3327 -0.015 Six-month bills 3.7725 3.8993 -0.003 Two-year note 98-173/256 3.9653 0.001 Three-year note 98-198/256 3.94 0.003 Five-year note 97-68/256 3.7361 -0.017 Seven-year note 96-168/256 3.675 -0.021 10-year note 93-112/256 3.5416 -0.031 20-year bond 94-24/256 3.8006 -0.044 30-year bond 89-232/256 3.5505 -0.031 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S.

2-year dollar swap 38.75 0.75 spread U.S. 3-year dollar swap 17.50 -0.50 spread U.S. 5-year dollar swap 8.75 0.00 spread U.S. 10-year dollar swap 6.00 -0.50 spread U.S. 30-year dollar swap -32.00 -1.25 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)

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