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TREASURIES-Benchmark yields highest since 2011, curve inversion deepens

·4 min read

(Adds data, auction results, supply outlook, quotes, updates prices) By Karen Brettell NEW YORK, Sept 22 (Reuters) - Benchmark U.S. Treasury yields hit an 11-year high on Thursday and a key part of the yield curve was the most inverted in at least two decades as investors positioned for the Federal Reserve to continue its hawkish stance toward hiking rates as it battles persistently high inflation. The U.S. central bank on Wednesday hiked interest rates by 75 basis points and signaled more increases are to come. The target interest rate was increased to a range of 3.00%-3.25% and new projections in the “dot plot” showed its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023. “The dot plot was more hawkish than expected, though it ended up being downplayed a bit,” said Michael de Pass, head of linear rates at Citadel Securities. Yields eased from highs on Wednesday after Fed Chairman Jerome Powell said that the so-called “dot plot” of rate expectations do not represent a plan or commitment, underscoring the difficulty in forecasting the economy's path. Benchmark 10-year Treasury yields have risen from four-month lows on Aug. 2 on rising expectations that the Fed will continue to tighten monetary policy and hold rates higher for longer even if it risks denting growth. This move has been led by so-called real yields, which account for expected inflation. “Given the move we’d seen, particularly in real yields, over the last couple of weeks the market had done a lot of work to price in expectations. The real takeaway is that the Fed is continuing on with its inflation mandate regardless of the effect on the job market,” said de Pass. Powell said that central bank officials are "strongly resolved" to bring down inflation from the highest levels in four decades and "will keep at it until the job is done." The yield curve between two-year and 10-year notes inverted as far as minus 58 basis points, the most inverted level since at least 2000, indicating rising concerns about an impending recession. It was last at minus 41 basis points. The curve between five-year and 30-year bonds also inverted to minus 34 basis points, before steepening back to minus 28 basis points "The flatness is here to stay," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. "You’re going to have the front end pegged to Fed expectations and the long-end looking towards the repercussions of tighter policy leading to perhaps a recession sooner than people have anticipated." Data on Thursday showed that the number of Americans filing new claims for unemployment benefits increased moderately last week, indicating the labor market remains tight. Traders were also focused on Thursday on whether Japan was selling Treasuries as the country intervenes to shore up the tumbling yen. Japan is the largest foreign holder of U.S. Treasuries, with $1.23 trillion in the assets as of July, according to government data. Two-year yields reached 4.163%, the highest since October 2007. Five-year yields hit 3.942%, the highest since November 2007 and benchmark 10-year yields jumped to 3.716%, the highest since February 2011. Real yields also rose on Thursday. Five-year yields on Treasury Inflation-Protected Securities (TIPS) reached 1.506%, the highest since June 2009. 10-year TIPS yields hit 1.322%, the highest since February 2011. The Treasury Department saw strong demand for a $15 billion sale of 10-year TIPS on Thursday. The debt sold at a high yield of 1.245% and the bid-to-cover ratio was 2.54 times, the highest since September 2021. The Treasury will sell $123 billion in coupon-bearing supply next week, including $43 billion in two-year notes on Monday, $44 billion in five-year notes on Tuesday and $36 billion in seven-year notes on Thursday. September 22 Thursday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 3.1625 3.232 -0.060 Six-month bills 3.775 3.9015 0.000 Two-year note 98-100/256 4.1223 0.127 Three-year note 98-62/256 4.1332 0.193 Five-year note 96-120/256 3.9183 0.203 Seven-year note 95-164/256 3.8468 0.203 10-year note 92-52/256 3.6979 0.186 20-year bond 92-168/256 3.9093 0.149 30-year bond 88-128/256 3.6338 0.114 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 40.50 1.00 spread U.S. 3-year dollar swap 15.25 -4.25 spread U.S. 5-year dollar swap 7.75 -1.50 spread U.S. 10-year dollar swap 4.75 -1.25 spread U.S. 30-year dollar swap -32.25 -1.25 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)