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TREASURIES-U.S. yields rise as strong data seen keeping Fed aggressive

·4 min read

(Adds comment, fresh prices) By Herbert Lash NEW YORK, Sept 15 (Reuters) - Treasury yields rose on Thursday, with the two-year hitting fresh 15-year highs, after data on retail sales and jobless claims showed a resilient economy that gives the Federal Reserve ample room to aggressively hike interest rates next week. With an unexpected rebound in U.S. retail sales and a slide in new unemployment claims to three-month lows pointing to a strong labor market, yields rose across the board and the recession warning of an inverted yield curve widened further. The two-year U.S. Treasury yield, a bellwether for rate expectations, initially pared gains after the data but surged 8.5 basis points on the day to 3.867%. The yield spiked iimmediatelyafter the data to a new 15-year high of 3.879%. Investors hoped the consumer price index (CPI) for August released earlier this week would show inflation peaking, as too hard of a Fed crackdown on rising prices could spur a recession. CPI rose 8.3% on an annualized basis, or more than economists' expectations of 8.1%, causing market turmoil. "When economists sink their teeth into the data that we got this week, there's really nothing the Fed can do in the short term to affect any of those price changes," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. "The optics of inflation are terrible," Vogel said. "Statistically, higher CPI by two-tenths over expectations, that's the same as two-tenths below." Expectations call for the Fed to hike rates by at least 75 basis points next week, with fed fund futures showing a 22% chance policymakers will raise rates by 100 bps when they meet on Sept. 20-21, according to the CME Fedwatch Tool. Retail sales increased 0.3% last month, but data for July was revised lower to show retail sales falling 0.4% instead of being unchanged as previously reported. In other data, initial claims for state unemployment benefits fell 5,000 to a seasonally adjusted 213,000 for the week ended Sept. 10, the lowest level since the end of May. "Broadly speaking the data we're getting seems to corroborate an economy that is somewhat resilient despite consistently high inflationary pressures," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. "You've seen a rebound in consumer sentiment, you've seen retail sales today bounce back," she said. "In this vicious cycle where the data continues to remain resilient, that would imply a Fed that would likely stay the course and continue to tighten policy." The gap between yields on two- and 10-year Treasury notes , seen as a recession warning when the yield curve inverts, widened to -41.4 basis points, or more than triple the -13.0 bps it was at a week ago. The yield on benchmark 10-year notes was up 4.3 basis points to 3.455%, while the yield on the 30-year Treasury bond rose 1 basis points to 3.479%. The rate on five-year U.S. Treasury Inflation-Protected breakeven Securities (TIPS) was last at 2.656%, after closing at 2.702% on Wednesday, far off its 2022 high of 3.639 set in April. The 10-year TIPS breakeven rate edged up to 2.453%, indicating the market sees inflation averaging about 2.5% a year for the next decade. The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.445%. Sept. 15 Thursday 3:07 PM New York / 1907 GMT Price Current Net Yield % Change (bps) Three-month bills 3.12 3.1882 -0.024 Six-month bills 3.6925 3.8146 0.000 Two-year note 98-217/256 3.8667 0.085 Three-year note 99 3.8565 0.076 Five-year note 97-142/256 3.6689 0.074 Seven-year note 97-36/256 3.5931 0.068 10-year note 94-32/256 3.4548 0.043 20-year bond 94-172/256 3.7573 0.019 30-year bond 91-32/256 3.4797 0.011 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 40.25 0.25 spread U.S. 3-year dollar swap 17.25 1.25 spread U.S. 5-year dollar swap 7.25 0.75 spread U.S. 10-year dollar swap 7.25 0.25 spread U.S. 30-year dollar swap -30.00 1.25 spread (Reporting by Herbert Lash; Editing by Andrea Ricci and Jonathan Oatis)