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U.S. Treasury yields rise as investors look for clues on Fed plans

April 28, 2022By Reuters

Treasury yields rose at the long end on Wednesday after the prior day’s rally as investors awaited greater clarity on the “restrictive” policy the Federal Reserve plans to pursue next week to combat inflation by curbing economic growth.

The yield on 10-year Treasury notes was last up 5.2 basis points to 2.824%, rebounding from earlier declines in yields across the curve. Three- and six-month bills were lower, but from two-year notes to 30-year bonds yields were higher.

“This week a lot of the price action you’ve seen in bonds has a lot more to do with the volatility,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

“There was also a feeling that perhaps the market had risen too fast too quickly,” she said, as investors anticipate an aggressive Fed as it sets about tackling high inflation.

Data showing the U.S. trade deficit in goods widened to a record high in March had little impact on the market, though it likely will add to the slower growth the Fed will cause as it pursues plans to shrink its USD 8.9 trillion balance sheet.

Trade has subtracted from gross domestic product growth for six straight quarters, the longest such stretch since the beginning of 2016.

The Fed and other central banks are moving into restrictive territory, said Marvin Loh, senior global macro strategist at State Street, referring to policy that restricts liquidity by lowering money supply make loans and credit more expensive.

But Loh said there’s a misunderstanding about how the policy, also referred to a quantitative tightening, actually works. The Fed will announce further details when policymakers meet May 3-4.

“We have very, very few experiences in terms of shrinking the balance sheet. They’ve only tried it once, and it ended fairly horribly,” he said, Referring to the Fed’s attempt in 2018 to reduce the balance sheet.

The Treasury sold USD 49 billion in five-year notes at a high yield of 2.785%. The auction was a little bit weaker than expected, Rajappa said.

The yield on the 30-year Treasury bond was up 4.4 basis points at 2.914%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 23.3 basis points.

The two-year U.S. Treasury yield was up 0.7 basis point at 2.589%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.3%, after closing at 3.274% on Tuesday, down from a more than 17-year peak of 3.639% hit last week.

The 10-year TIPS breakeven rate was last at 2.893%, indicating the market sees inflation averaging about 2.9% a year for the next decade.

The U.S. 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 2.632%.

(Reporting by Herbert Lash; editing by Barbara Lewis and Jonathan Oatis)

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