Yields hit decade highs before expected 75 bp Fed rate hike

By Karen Brettell

NEW YORK (Reuters) – U.S. Treasury yields climbed to their highest levels in a decade on Tuesday as investors raised bets that the Federal Reserve will hike rates by 75 basis points when it concludes its two-day meeting on Wednesday.

Surging consumer prices in May, which rose at their fastest pace in nearly 40-1/2 years, has rattled markets and increased speculation that the U.S. central bank will hike rates at a faster pace than previously expected to stem rising price pressures.

Fed funds futures traders are now pricing in an 87% chance of a 75 basis point increase on Wednesday, and a 13% chance of a 50-basis-point increase.

Economists upped their rate hike forecasts after a Wall Street Journal article on Monday said that Fed officials would consider a 75 basis point hike, which was interpreted as being an informal communication by the U.S. central bank.

“In our view, given the Fed’s blackout period, Powell decided a WSJ article was the only option ahead of tomorrow’s meeting to prepare markets that 75 is now on the table,” Kevin Cummins, chief U.S. economist at NatWest Markets said in a note on Tuesday.

Fed Chairman Jerome Powell had said after the Fed’s May 3-4 meeting that central bank officials are not “actively” considering a rate hike of three-quarters of a percentage point at coming monetary policy meetings.

Data on Tuesday showed that U.S. producer prices increased solidly in May as the cost of gasoline surged in another sign of stubbornly high inflation.

Expectations of aggressive Fed tightening, and an inversion in a key part of the Treasury yield curve, have also increased fears that the U.S. economy could be headed into a downturn. However, Padhraic Garvey, regional head of research, Americas at ING, said it is too soon to expect a recession.

So-called real yields, which account for expected inflation, have driven recent yield increases, which is consistent with strong growth, Garvey said, adding that “before we get to the recession we have a whole different dynamic, which is really elevated inflation and an economy that is still strong.”

Yields on 10-year Treasury Inflation-Protected Securities (TIPS), known as real yields, hit 0.857% on Tuesday, the highest since Feb. 2019. Five-year TIPS yields reached 0.686%, the highest since March 2020.

Two-year Treasury note yields reached 3.439%, the highest since Nov. 2007. Benchmark 10-year notes hit 3.475%, the highest since April 2011.

The closely watched yield curve between two-year and 10-year notes was last five basis points, after earlier inverting by five basis points. An inversion in this part of the curve is viewed as a reliable indicator that a recession is likely in one to two years.

Another part of the yield curve that is viewed as a recession indicator, the gap between two-year and five-year yields, remains positive at 15 basis points.

June 14 Tuesday 2:54PM New York / 1854 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.7625 1.7951 0.133

Six-month bills 2.335 2.3957 0.184

Two-year note 98-65/256 3.4288 0.148

Three-year note 98-2/256 3.5813 0.117

Five-year note 95-172/256 3.5852 0.105

Seven-year note 94-246/256 3.5742 0.113

10-year note 95 3.4752 0.104

20-year bond 93-120/256 3.7169 0.079

30-year bond 89-168/256 3.4306 0.062

dollar swap spreads

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 35.00 -2.75

spread

U.S. 3-year dollar swap 16.00 -2.00

spread

U.S. 5-year dollar swap 5.00 0.50

spread

U.S. 10-year dollar swap 7.00 0.50

spread

U.S. 30-year dollar swap -27.00 -2.50

spread

(Reporting by Karen Brettell; Editing by Lisa Shumaker)