TREASURIES-Yields gain as inflation, personal income rise

By Karen Brettell NEW YORK, Dec 23 (Reuters) - U.S. Treasury yields rose on Friday after data showed that personal income rose more than expected in November while inflation data for October was revised upward, supporting the view that the Federal Reserve will continue to hike rates as it battles stubbornly high price pressures. Personal income rose by 0.4% in the month, beating economists' expectations for a 0.3% gain. The personal consumption expenditures (PCE) price index rose 0.1% last month and its October gain was revised upward to 0.4%, from 0.3%. In the 12 months through November, the PCE price index increased 5.5% after advancing 6.1% in October. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also edged up 0.1% in November, while data for October was revised upward to show spending surging 0.9% instead of 0.8% as previously reported. There was “a little bit of an upside surprise," said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte, North Carolina. However, there is "still a meaningful downshift." “I think the story of inflation starting to cool is still intact and I don’t think this number is going to necessarily change anything as far as the narrative goes as far as the Fed probably having to tighten at least a little bit more in 2023,” he said. Benchmark 10-year yields rose 7 basis points to 3.743%, and two-year yields gained 6 basis points to 4.328%. The inversion in the yield curve between two-year and 10-year yields retraced by around 1 basis point to minus 58 basis points. Investors are evaluating how high the Fed is likely to hike rates as it battles inflation, but also stares down the likelihood of a widely expected recession next year. Fed officials expect the fed funds rate to rise above 5% next year, and Fed Chair Jerome Powell has stressed the need to keep rates elevated for a time. “There is no question the incoming Fed rhetoric remains hawkish,” BMO Capital Markets analysts Ian Lyngen and Benjamin Jeffery said in a report on Friday. “We continue to see the potential for upward pressure on front-end yields ... (as) the market begrudgingly concedes that while the global real economy might be facing a series of headwinds in 2023, Powell is actively attempting to reestablish lost Fed credibility that it took decades to gain,” they said. Fed funds futures traders are pricing for a more dovish scenario than the U.S. central bank, with the fed funds rate expected to peak at 4.92% in May and decline to 4.47% by year-end. CreditSights’ Griffiths said that the Fed may not hike the rate as far as it is currently indicating, but it may be a mistake to assume they will begin cutting so soon next year. “We think the biggest mispricing is probably the quick shift to rate cuts in 2023, so perhaps they take the policy rate not quite as high as the 'dot plot' suggests but hold it there for longer,” he said. Meanwhile, analysts warned against reading too much into this week’s market moves, with volumes in decline and expected to continue to worsen heading into the Christmas and New Year holidays when many traders will be out, or reluctant to take risk. The bond market will close early on Friday at 2 p.m. EST and will be closed on Monday. December 23 Friday 9:30AM New York / 1430 GMT Price Current Net Yield % Change (bps) Three-month bills 4.2325 4.3351 0.003 Six-month bills 4.525 4.6922 0.013 Two-year note 100-80/256 4.3275 0.063 Three-year note 99-186/256 4.0984 0.076 Five-year note 100-4/256 3.871 0.084 Seven-year note 100-44/256 3.8461 0.077 10-year note 103-32/256 3.7434 0.072 20-year bond 100-44/256 3.9871 0.076 30-year bond 103-136/256 3.8011 0.077 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 28.25 -0.50 spread U.S. 3-year dollar swap 13.25 -0.25 spread U.S. 5-year dollar swap 3.50 -0.50 spread U.S. 10-year dollar swap -4.00 -0.50 spread U.S. 30-year dollar swap -42.00 0.25 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)