US yields rise on potential higher rates in 2022

NEW YORK: US Treasury yields rose on Friday as a repricing of portfolios continues in the wake of the Federal Reserve's decision to soon begin tapering its massive bond purchases, a move that could lead to higher interest rates next year.

The yield on 10-year Treasury notes was up 3.7 basis points to 1.447% in early trade, up from the closing yield of 1.304% on Wednesday.

The Fed should start to reduce its support for the economy in November and could start raising rates by the end of 2022 if labor markets continue to improve as expected, Cleveland Federal Reserve Bank President Loretta Mester said on Friday.

The hawkish tone set by Fed Chair Jerome Powell on Wednesday sparked a sell-off in Treasuries, which was heightened by the Bank of England saying on Thursday the case for higher rates "appeared to have strengthened".

"The combination of the Fed and the Bank of England meetings were the starting pistol," said Jim Vogel, interest rate strategist at FHN Financial in Memphis, Tennessee.

"In turns like this the sellers always have the first and the upper hand and as buying continues, you can see some of the sell-off perhaps begin to slow after next week," he said.

Investors are positioning for next week's auction of $61 billion in five-year notes and $62 billion in seven-year notes, which will set their price level, Vogel said.

For the five-year, now above 0.9% on its yield, it could rise to 1%, while for the seven the range is 1.25% to 1.3%. The Treasury also will auction $60 billion of two-year notes.

Investors remain wary of any fallout from heavily indebted China Evergrande and the potential for news over the weekend and the debt ceiling negotiations in Washington also are a concern, Vogel said.

The yield on the 30-year Treasury bond was up 4.1 basis points to 1.965%.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 117.9 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 0.9 basis points at 0.268%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.474%.

The 10-year TIPS breakeven rate was last at 2.327%, indicating the market sees inflation averaging 2.33% a year for the next decade.