By Herbert Lash
NEW YORK, Jan 13 (Reuters) - U.S. Treasury yields slid on
Wednesday after Federal Reserve officials pushed back against
tighter monetary conditions anytime soon, even with the prospect
of higher inflation ahead.
Investors awaiting an auction of 30-year government debt
shrugged off a report showing an increase in U.S. consumer
prices in December amid rising gasoline costs, as underlying
inflation remained tame amid the COVID-19 pandemic, which has
hit the labor market and the services industry.
The Labor Department said its consumer price index increased
0.4% after gaining 0.2% in November, with an 8.4% jump in
gasoline prices accounted for more than 60% of the CPI rise.
In the 12 months through December the CPI advanced 1.4%
after increasing 1.2% in November.
Yields on the 10-year note jumped about 20 basis points in
the past week through Tuesday on expectations that new fiscal
stimulus will boost economic growth and increase Treasury supply
after Democrats won control of the White House and Congress.
But yields on the benchmark Treasury note
dropped to 1.110% in early trade, down from an almost 10-month
high of 1.187% on Tuesday.
The CPI report was relatively in line with expectations,
although the market's outlook on inflation is now at its highest
level since 2018, said Kevin Flanagan, head of fixed income
strategy at WisdomTree Investments Inc.
"When you're looking at the future, though, with respect to
the CPI numbers, the year-over-year comparisons are going to
begin to weigh in favor of that reflation trade," Flanagan said.
Inflation readings last year in March, April and May were
very low, which could lead to upside surprises when year-on-year
comparisons are taken into account in the months ahead, he said.
"It does appear that the stars are in alignment for perhaps
a move to the 1.25% and 1.5%," he said.
All signs point to rising U.S. inflation though the Federal
Reserve won't preemptively react to higher consumer prices by
tightening policy, St. Louis Federal Reserve President James
Bullard said Wednesday at the Reuters Next conference.
The money supply has "exploded," fiscal deficits are "off
the charts" and a hot economy may either already be here or
"just around the corner," Bullard said.
But the Fed needs to regain credibility on inflation after
it has underrun the central bank's 2% target for the last
decade, he added in the interview.
Investors in the past week have pushed yields higher in
anticipation the Fed could begin raising rates as soon as 2023.
That would be earlier than previously expected.
Fed speakers this week have pushed back at speculation that
they are close to curbing bond purchases or raising rates.
Boston Federal Reserve Bank President Eric Rosengren said
Tuesday that it may be years before inflation reaches the Fed's
2% target, suggesting the central bank may need to maintain the
pace of its asset purchases through at least the end of 2021.
Cleveland Federal Reserve Bank President Loretta Mester also
said on Tuesday that it is too early to talk about adjusting
monetary policy or changing the pace or scale of the Fed's asset
purchases with coronavirus cases still rising.
The yield curve between two-year and 10-year notes
pared recent gains to 96.20 basis points.
Thirty-year bond yields slid to 1.849% from a
high of 1.915% on Tuesday, the highest level since March 20.
The Treasury Department will sell $24 billion in 30-year
bonds on Wednesday. It saw strong demand for $38 billion in
10-year notes on Tuesday.
Five-year note yields fell to 0.490%, down from Tuesday when
they traded at the highest since March 26.
January 13 Wednesday 10:31AM New York / 1531 GMT
Price Current Net
Yield % Change
Three-month bills 0.085 0.0862 0.000
Six-month bills 0.09 0.0913 0.000
Two-year note 99-244/256 0.149 0.002
Three-year note 99-176/256 0.2296 -0.005
Five-year note 99-114/256 0.4883 -0.016
Seven-year note 98-192/256 0.81 -0.026
10-year note 97-216/256 1.107 -0.031
20-year bond 95-108/256 1.6465 -0.035
30-year bond 94-220/256 1.8499 -0.035
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 7.25 -0.50
U.S. 3-year dollar swap 6.50 -0.25
U.S. 5-year dollar swap 7.00 -0.25
U.S. 10-year dollar swap 0.75 0.25
U.S. 30-year dollar swap -25.25 0.25
(Reporting by Herbert Lash, additional reporting by Karen
Brettell in New York, editing by Alexander Smith)
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