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TREASURIES-U.S. yields rise after inflation data, higher yields in Europe

·3 min read

By Gertrude Chavez-Dreyfuss NEW YORK, Jan 29 (Reuters) - U.S. Treasury yields added to gains on Friday after data showed inflation perked up last month, while employment costs rose suggesting the world's largest economy is on the mend from the devastating effects of the pandemic. Yields already were on the rise after climbing overnight in tandem with those in Europe after a Reuters story, citing sources, said the European Central Bank was unlikely to cut its already-record low policy rate as this would do little to revive the pandemic-hit euro zone economy. The U.S. yield curve steepened as a result of the increase in long yields, with the spread between 2-year and 10-year notes hitting 98.20 basis points, the widest in about a week. U.S. data showed the personal consumption expenditures (PCE) price index, excluding the volatile food and energy component, increased 0.3% after being unchanged in November. The core PCE index is the preferred inflation measure for the Fed's 2% target. "The one main reason for the move in Treasuries was the data: inflation was a little better than expected and trending in the right direction," said Patrick Leary, chief market strategist, at broker-dealer Incapital. The break-even inflation rate on 10-year Treasury Inflation Protected Securities, a gauge of expected annual inflation over the next 10 years, rose to as high as 2.089%, after the PCE price data, up from 2.04% on Thursday. A separate report from the Labor Department on Friday showed its employment cost index (ECI), the broadest measure of labor costs, rose 0.7% last quarter after advancing 0.5% in the third quarter. The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation. In mid-morning trading, the U.S. benchmark 10-year yield rose to 1.087%, from 1.055% late on Thursday. It hit a one-week high of 1.105%. U.S. 30-year yields advanced to 1.847% from Thursday's 1.819%, after earlier rising to a one-week peak of 1.87%. U.S. two-year yields remained anchored, slightly down on the day at 0.117%, from 0.121% on Thursday. Incapital's Leary said the market could be hit by month-end buying later in the session that could push yields lower. Index extension happens because bond portfolios that track indexes need to be rebalanced at the end of the month. "If you are a traditional 60-40 portfolio, stocks are up on the month and bonds are down on the month. We would expect to see Treasury buying and stock selling," Leary said. January 29 Friday 10:40 AM New York/1540 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0575 0.0583 -0.005 Six-month bills 0.0775 0.0786 0.000 Two-year note 100-4/256 0.1172 -0.004 Three-year note 99-212/256 0.1834 -0.003 Five-year note 99-170/256 0.443 0.013 Seven-year note 99-208/256 0.7776 0.022 10-year note 98-12/256 1.0859 0.031 20-year bond 95-60/256 1.6585 0.030 30-year bond 94-240/256 1.8467 0.028 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 0.25 spread U.S. 3-year dollar swap 8.25 0.25 spread U.S. 5-year dollar swap 9.50 0.25 spread U.S. 10-year dollar swap 4.25 0.25 spread U.S. 30-year dollar swap -24.25 0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci)