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TREASURIES-U.S. yields rise on German inflation data scare

·3 min read

By Davide Barbuscia NEW YORK, Aug 19 (Reuters) - U.S. Treasury yields rose on Friday, mimicking European bonds after Germany reported record-high increases in monthly producer prices, which are seen as a leading indicator for inflation. Yields, which move inversely to prices, rose more significantly for benchmark 10-year Treasuries and to a smaller extent among shorter-dated U.S. government bonds. "The epicentre of the backup in bond yields is coming from Europe," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. Producer prices in July in Germany - the euro zone's leading economy - leapt 37.2% from the same time last year and 5.3% from June, mainly because of rising energy costs. German bond yields rose, with the 10-year yield hitting a four-week high, as the data was seen as reinforcing fears of "stagflation" - a combination of high inflation and low growth. "The German PPI (Producer Price Index) is causing European yields to rise and that's rippling across global bond yields," Miskin said. Benchmark U.S. Treasury 10-year note yields rose about nine basis points from their close on Thursday to 2.975%, and five-year note yields climbed to 3.107%, with both hitting new one-month highs. U.S. Treasury two-year yields were also higher, at 3.277%, but faring better than longer-dated bonds. The rising pressure in yields offset a rally on Thursday which was partly due to investors getting some relief from the minutes of the Federal Reserve's July 26-27 policy meeting. The minutes, which were released on Wednesday, were seen by many as confirming a less aggressive stance in the U.S. central bank's fight against inflation. A string of Fed officials on Thursday said the central bank needs to keep raising borrowing costs to bring high inflation under control, even as they debated how fast and how high to lift them. The comments, however, were no smoking gun for Treasury yields, with investors now likely to be looking for direction from Fed Chair Jerome Powell when he addresses the annual global central banking conference in Jackson Hole, Wyoming, on Aug. 26. The closely watched yield curve between two- and 10-year notes, which has been inverted since early July, was at minus 30.1 basis points on Friday, its smallest inversion since Aug. 1. It reached minus 56 basis points on Wednesday last week, the deepest inversion since 2000. An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12 to 18 months. August 19 Friday 9:42AM New York / 1342 GMT Price Current Net Yield % Change (bps) Three-month bills 2.625 2.6784 0.009 Six-month bills 3.0275 3.1162 0.023 Two-year note 99-123/256 3.2779 0.043 Three-year note 99-136/256 3.2912 0.044 Five-year note 98-96/256 3.1071 0.076 Seven-year note 97-76/256 3.0601 0.088 10-year note 98-16/256 2.9758 0.096 20-year bond 98-224/256 3.4534 0.090 30-year bond 95-196/256 3.2213 0.080 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 33.50 -1.25 spread U.S. 3-year dollar swap 11.75 0.00 spread U.S. 5-year dollar swap 2.75 -0.25 spread U.S. 10-year dollar swap 4.75 0.25 spread U.S. 30-year dollar swap -32.50 0.00 spread (Reporting by Davide Barbuscia; Editing by Paul Simao)