Yields rise before Federal Reserve meeting

Benchmark 10-year US Treasury yields rose to a three-week high on Friday before the Federal Reserve is expected to cut rates this week by 25 basis points and signal it will pause rate cuts as it grapples with inflation running above its 2% annual target.

The closely watched part of the Treasury yield curve between three-month bills and 10-year notes also turned positive for the first time since November 2022.

Fed policymakers have stated that recent upticks in price pressures are part of the bumpy path to lower inflation and not a reversal of the disinflationary trend.

But analysts say they are also likely to be wary of renewed higher price pressures with President-elect Donald Trump set to take office in January.

“They have to take into account that in an economy where inflation is showing itself at this point to be sticky, and you’re very highly likely going to get further fiscal stimulus, deregulation, and some aspect of tariffs coming through, there’s just no way you can validate why you keep cutting in that instance,” said Tom Fitzpatrick, head of global market insights at R.J. O’Brien in New York.

Fed policymakers are also due to update their economic projections and interest-rate outlook, known as the “dot plot,” on Wednesday at the conclusion of the US central bank’s two-day meeting.

“I think they give a very strong guidance that they’re going to pause in January and also you’ll almost certainly see a revision of the dots in terms of the anticipation of the terminal rate,” Fitzpatrick said.

The Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, is due next Friday, after the Fed meeting.

The headline and core PCE data is expected to show that prices rose by 0.2% each in November, for an annual gain of 2.5% and 2.9%, respectively.

Benchmark 10-year note yields were last up 7.9 basis points at 4.403%, the highest since Nov. 22.

Two-year note yields, which are highly sensitive to Fed interest-rate policy, rose 5.5 basis points to 4.241%, the highest since Nov. 27.

The yield curve between two-year and 10-year notes steepened by around three basis points to 16 basis points.

The yield curve between three-month bills and 10-year notes was last at seven basis points, turning positive on Friday for the first time in two years.

An inversion in this part of the yield curve is seen as an indicator that a recession is likely in the next one to two years. The curve typically turns positive before the recession sets in as traders price expected Fed rate cuts into the shorter-dated debt.

But analysts say it does not necessarily indicate an economic downturn is near, with steepening in the US yield curve this week being largely due to concerns about the long-term US fiscal outlook leading longer-dated yields higher.

“The price action this week seems like concern over the fiscal situation,” said Angelo Manolatos, macro strategist at Wells Fargo in Charlotte.

“The yield curve disinverting has largely been a function of the Fed being in an easing cycle and now we are pricing in some potential fiscal premium further out the curve as well,” he said.

The curve between two- and 10-year notes turned positive on Aug. 5, after being inverted since July 2022. An inversion in this part of the curve has also traditionally been viewed as a recession indicator, though the yield-curve inversions this time have lasted longer than in previous episodes.

(Reporting By Karen Brettell; Additional reporting by Harry Robertson; Editing by Nick Zieminski, William Maclean, and Rod Nickel)