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TREASURIES-Two-year yields highest since 2007 as Fed officials talk up rate hikes

·4 min read

(Adds comments from Fed officials, data, quote, next week's supply, updates prices) By Karen Brettell NEW YORK, Sept 9 (Reuters) - Interest-rate sensitive two-year Treasury yields hit more than 14-year highs on Friday and the yield curve inverted further as Federal Reserve officials stressed the need for more rate hikes to stem soaring inflation. Fed Governor Christopher Waller said on Friday that the U.S. central bank should be aggressive with rate hikes while the economy "can take a punch," and said that he supports a "significant increase" in the Fed's target policy rate at this month’s meeting. St. Louis Fed President James Bullard also reiterated his call for a hike of 75 basis points at the meeting, saying recent data showing continued strong job growth had him "leaning more strongly" towards the larger rise in borrowing costs. Kansas City Fed President Esther George, meanwhile, made the case for a "sustained policy response" to high inflation. "Various Fed speakers once again proved their vigilance against inflation," Jim Vogel, an interest rate strategist at FHN Financial said in a note. The comments come a day after Fed Chairman Jerome Powell reconfirmed that the U.S. central bank’s priority is to tackle soaring price pressures. “Powell ... sounded hawkish,” said Benjamin Jeffery, interest rate strategist at BMO Capital Markets in New York. The comments sent the closely watched two-year, 10-year Treasury yield deeper into negative territory, a sign of rising growth concerns as the Fed presses on with tightening monetary policy. This part of the yield curve flattened by 6 basis points to minus 25 basis points on Friday. The inversion is viewed as a reliable indicator that a recession is likely in the next one to two years. A Fed report showed on Friday that U.S. household wealth fell by a record $6.1 trillion in the second quarter to its lowest in a year as a bear market in stocks far outweighed further gains in real estate values. The next major focus will be Tuesday’s Consumer Price Index (CPI) data, which is expected to show that prices rose at an 8.1% pace over the year in August, compared with an 8.5% print for July. The data will come after Fed officials enter into a blackout period before their Sept. 20-21 meeting. Even if price pressures come in below expectations, analysts see it as unlikely to sway the Fed from its path. “Given the fact that the Fed has told us they want to take the data in its totality, it’s challenging to envision a large enough disappointment on the CPI read that would take a 75-basis point hike off the table in September,” said Jeffery. Two-year yields reached 3.575%, the highest since November 2007. Benchmark 10-year note yields were last 3.321%. They have risen from a four-month low of 2.516% on Aug. 2 but are holding below the 11-year high of 3.498% reached on June 14. Treasuries could come under pressure next week as the Treasury Department sells $91 billion in new debt. This will include $41 billion in three-year notes and $32 billion in 10-year notes, which will both be auctioned on Monday, and $18 billion in 30-year bonds due for sale on Tuesday. September 9 Friday 3:02PM New York / 1902 GMT Price Current Net Yield % Change (bps) Three-month bills 2.9775 3.0407 0.012 Six-month bills 3.4375 3.5455 0.078 Two-year note 99-102/256 3.569 0.078 Three-year note 98-170/256 3.6099 0.067 Five-year note 98-142/256 3.4439 0.047 Seven-year note 98-60/256 3.4118 0.034 10-year note 95-52/256 3.3212 0.029 20-year bond 95-88/256 3.7075 0.016 30-year bond 91-132/256 3.4572 0.016 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 33.50 -2.50 spread U.S. 3-year dollar swap 10.00 -1.00 spread U.S. 5-year dollar swap 5.75 0.00 spread U.S. 10-year dollar swap 6.75 -0.25 spread U.S. 30-year dollar swap -32.25 0.00 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)