By Karen Bretel
(Reuters) – Yields on 10-year benchmark bonds hit a 2011 high on Monday and a key part of the yield curve reversed for the first time since April as investors prepare for the Fed’s efforts to halt rising inflation will hit the economy.
Yields jumped after data on Friday showed that consumer prices in the US accelerated in May as gasoline prices peaked and food costs soared, leading to the largest annual increase in 40-1 / 2 years. .
The Fed is expected to raise interest rates by 50 basis points when it concludes its two-day meeting on Wednesday, with investors now seeing a 75 basis point increase as they have a 27% chance.
UBS strategic analyst Rohan Khanna said that the European Central Bank’s aggressive communication along with inflation “completely made the idea that the Fed may not deliver 75 bps or that other central banks will move at a gradual pace.”
Investors are speculating that the Fed will raise interest rates higher than previously expected this cycle as it faces stubbornly high price pressures.
Fed futures traders now expect the Fed reference rate to rise to 3.88% by May, almost one percentage point higher than expected last month and 0.83% now.
Deutsche Bank said it now sees interest rates peak at 4.125% in mid-2023.
As the Fed tightens its grip on politics, the nerves for an economic downturn are mounting. The yield curve of the two-year, 10-year Ministry of Finance reversed briefly on Monday, a reliable indicator that a recession will follow in one to two years.
However, Jim Vogel, strategic strategist at FHN Financial, said the recession is not currently priced in the market.
“There is a fear that the Fed or any central bank may surround us in a global recession, but not in a complete recession, otherwise the peak of the Treasury curve would not be five years, it would be two years,” he said. Vogel.
Two-year yields reached 3.250%, the highest since December 2007. Five-year yields rose to 3.434%, the highest since July 2008, 10-year benchmark yields reached 3.295%, the highest since April 2011 .
The yield curve between the two-year and 10-year banknotes was reversed by up to two basis points, before returning to positive ground at the seven basis points. The difference between the returns of the two-year and five-year banknotes remained positive at 19 basis points.
The five-year and 30-year yield curves reversed up to 17 basis points, following Friday’s reversal for the first time since May 4.
Some Fedwatchers, meanwhile, are skeptical that the US Federal Reserve will move faster with interest rate hikes. Pictet Wealth Management senior economist Thomas Costerg noted, for example, that most inflation factors, such as food and fuel, remain beyond the control of central banks.
“During the summer, they will know the growth data and housing that is starting to look more volatile,” Costerg said.
June 13 Monday 9:57 a.m. New York / 1357 GMT
Price Current Net
Quarterly bills 1.405 1.4293 0.066
Semi-annual accounts 2.0775 2.1281 0.168
Biennial note 98-168 / 256 3.2119 0.163
Three-year note 98-136 / 256 3.3941 0.169
five-year note 96-130 / 256 3.3956 0.143
seven-year note 96-48 / 256 3.3688 0.129
note 10 years 96-156 / 256 3.278 0.121
20-year bond 95-136 / 256 3.5651 0.115
30-year bond 91-224 / 256 3.3046 0.107
EXCHANGES OF DOLLAR EXCHANGES
Last (bps) Net
2-year US dollar exchange 39.75 2.75
3-year exchange of US dollars 19.75 1.25
Exchange of US dollars 5 years 5.00 1.00
10-year exchange of US dollars 6.75 0.75
30-year exchange of US dollars -24.25 0.25
(Additional citations by Yoruk Bahceli and Sujata Rao in London; Edited by Dhara Ranasinghe, Mark Potter and Angus MacSwan)