Long-dated yields advance as US data supports higher rate outlook

NEW YORK: US long-dated Treasury yields rose on Wednesday, extending a trend over the last few weeks fueled by solid US economic data that reinforced expectations of multiple interest rate hikes over the next 12 months.

Data on US producer prices, which rose in September after declining the previous month, added to the hawkish outlook on interest rates as it suggested that inflationary pressures were accelerating.

The report showed producer prices gained 0.2 percent last month, reversing an unexpected drop in August and in line with expectations. More importantly, a key measure of underlying producer price pressures that excludes food, energy and trade services grew 0.4 percent, the largest increase since January.

"The market for quite some time has under-appreciated the Federal Reserve's rate hikes," said Bill Merz, head of fixed income research at US Bank Wealth Management in Minneapolis.

"Despite the meaningful repricing last week of rate expectations, that gap still has to be resolved. We expect the market to continue to catch up, which is more likely than the Fed lowering its rate path."

Merz added that the disparity between the market's expectation for rates and the Fed's forecast underpins a big component of US Bank's view that calls for rising yields across the curve.

Also on Wednesday, the Treasury held two key auctions with fair to modest results - $36 billion in US 3-year notes, and $23 billion in reopened 10-year notes.

The US 3-year note sold at a yield of 2.989 percent, the highest at an auction of this maturity since May 2007. The bid-to-cover ratio, a measure of demand, was 2.56, which was the lowest since July. The ratio was 2.68 at the previous 3-year note sale in September.

The US 10-year note, on the other hand, picked up a yield of 3.225 percent, the highest since May 2011. The bid-to-cover ratio was 2.39, the lowest since February, while the ratio in September was 2.58.

In afternoon trading, the US 10-year yields were last at 3.221 percent, up from 3.208 percent late on Tuesday.

In one of the swiftest market moves, the yield on the 10-year Treasury bond rallied from 3.07 percent to 3.22 percent last week.

"There's a decent chance that we will stall out here on the 10-year," said Jerry Paul, senior vice president and fixed income portfolio manager at ICON Advisers in Denver.

"Maybe we're finding a new trading range. Maybe it's now 3.25-3.50 percent. But I would think that uptick would slow down."

US 30-year yields were also higher at 3.394 percent , versus Tuesday's 3.369 percent.

Post-auction, yields on US 3-year notes were at 2.976 percent, down from 2.982 percent on Tuesday.