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NEW YORK: US Treasury yields rose on Friday after data showed underlying inflation pressures remain elevated, suggesting to the bond market that the Federal Reserve will move forward with its aggressive interest rate hiking campaign.

The personal consumption expenditures price index rose 6.2% in the 12 months through September to match the prior month’s rise. The core PCE price index, excluding food and energy, advanced 5.1% annually after a 4.9% gain in August.

Market rates had declined over the past week on speculation the Fed might soon pause its hiking because it could spark a recession. But with inflation showing few signs of abating, that view dissipated as the 10-year Treasury yield edged above 4%.

“The market reaction makes sense,” said Priya Misra, head of global rates strategy at TD Securities. “Inflation will not allow the Fed to pause anytime soon.”

Steven Ricchiuto, US chief economist at Mizuho Securities in New York, said he doubted the sell-off in bonds is over as the Fed is not at the point where the US central bank will significantly change its target, or terminal, policy rate.

“All the data is telling us that the Fed’s terminal rate is higher than what the market is currently anticipating,” he said. “Whether they go in December from 75 (basis points) to 50 doesn’t necessarily change the terminal rate and that’s the key issue.”

Fed funds futures are pricing in a 98.4% probability that the Fed will raise rates by 75 basis points when policymakers meet Nov. 1-2. In the past week the market cut expectations for an almost 5% target rate by March 2023 to 4.85% by May 2023. That rate edged up to 4.91% in late day trading.

The bond market’s view on rates differs from the equity market’s, where investors hope the Fed pauses its rate hikes.

“The equity market wants one thing and the bond market is thinking another, and at some point the train will meet but not particularly right now,” Ricchiuto said.

The yield spread on three-month bills and 10-year notes was -7.5 basis points, showing it had inverted with yields of shorter-dated securities higher than longer ones. The spread this week closed negative for the first time since March 2020, indicating a recession lies ahead.

The yield on 10-year notes rose 7.5 basis points to 4.014%, while the 30-year yield was up 4.3 basis points to 4.137%.

The two-year yield, which typically moves in step with interest rate expectations, was up 9.5 basis points at 4.416%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.632%.

The 10-year TIPS breakeven rate was last at 2.497%, indicating the market sees inflation averaging about 2.5% a year for the next decade.

The US 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 2.575%.


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