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NEW YORK, Sept 19 – US five- and 10-year Treasury yields reached 16-year highs on Tuesday as oil prices gained, a day before the Federal Reserve will conclude its two-day monetary policy meeting.

Oil prices rose to 10-month highs as weak US shale output compounded supply concerns from extended production cuts by Saudi Arabia and Russia.

This is raising fears that higher commodity prices will keep price pressures elevated and lead the Fed to hike rates further, or keep them elevated for longer.

“We have a bit of an upward bias on yields as a function of higher energy prices and increasing concern that that’s going to flow through to end users and complicate the Fed’s job of attempting to engineer a soft landing,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

Five-year notes hit 4.522% and 10-year yields reached 4.367%, both the highest since 2007.

The US central bank is expected to keep rates steady on Wednesday, though investors will be focused on any new indications that further hikes could be forthcoming.

Fed officials will release their latest predictions on the economy and where rates are likely to be over the coming quarters.

Lyngen said expectations for the employment rate may be key “as that’s really the one component that has allowed the Fed to continue its battle against inflation without having to risk overshooting.”

“As long as the job market remains resilient the Fed will be able to continue to push rates higher if need be, and more importantly avoid cutting rates as long as possible,” Lyngen added.

Fed funds futures traders are pricing in a 29% chance of a Fed hike in November, and a 40% probability of an increase by December, according to the CME Group’s FedWatch tool.

Data on Tuesday showed US homebuilding plunged to a more than three-year low in August as a resurgence in mortgage rates weighed on demand for housing, though a jump in permits suggested new construction remained supported by a dearth of homes on the market.

Two-year yields reached 5.111% and are holding just below the 5.120% level reached on July 6, the highest since 2007.

The yield curve between two- and 10-year notes was last at minus 75 basis points.

The US Treasury Department saw solid demand for a USD 13 billion sale of 20-year bonds on Tuesday.

The bonds sold at a high yield of 4.592%, less than a basis point below the level before the sale.

Demand was 2.74 times the amount of debt on offer, the highest since June.

The Treasury will also sell USD 15 billion in 10-year TIPS on Thursday.

September 19 Tuesday 3:10PM New York / 1910 GMT

(Reporting by Karen Brettell; editing by David Evans and Richard Chang)

NEW YORK, Sept 18 – Benchmark 10-year yields on Monday held just below 16-year highs reached last month before the Federal Reserve on Wednesday is expected to leave rates unchanged but could signal that it is open to further increases.

Rising oil prices have raised concerns that inflation could remain stubbornly elevated, and make the US central bank more likely to keep tightening.

Data last week showed that US consumer prices increased by the most in 14 months in August as the cost of gasoline surged.

“The narrative is – is inflation increasing? Does that necessarily keep the Fed on the sidelines if these numbers continue to show strength,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York.

The 10-year yields were little changed on the day at 4.317%, and were holding just below the 4.366% level reached on Aug. 22, which was the highest since 2007.

“Right now, the market is teetering on the high yields of the year, and I think that it’ll be make-or-break depending on what the Fed does and what their rhetoric is,” di Galoma said.

Fed officials will also release their latest predictions on the economy and where rates are likely to be over the coming quarters when it concludes its two-day meeting on Wednesday.

Fed funds futures traders are pricing in a 31% chance that the Fed hikes in November, and see a 42% chance of a hike by December, according to the CME Group’s FedWatch Tool.

Two-year yields rose three basis points to 5.062%. The yield curve between two-year and 10-year notes was last at minus 75 basis points.

Treasury trading volumes in August, meanwhile, were up 19% over the previous year with USD 744 billion in average daily notional volume, Kevin McPartland, head of research – market structure & technology at Coalition Greenwich, noted on Monday in a report.

“The increase was driven by the now standard string of inflation and jobs reports, with an additional shot in the arm provided by recent research presented at Jackson Hole,” McPartland said.

This data includes coupon Treasury debt and Treasury bills, but not Treasury Inflation-Protected Securities (TIPS).

The US Treasury Department will sell USD 13 billion in 20-year bonds on Tuesday and USD 15 billion in 10-year TIPS on Thursday.

Yields on 10-year TIPS, or so-called real yields, reached 2.021% on Monday and are up from a low of 1.357% in July.

September 18 Monday 3:00PM New York / 1900 GMT

(Reporting by Karen Brettell; Editing by Kirsten Donovan and Will Dunham)

Sept 18 – The Bank of Japan’s policy meeting on Friday is the highlight of the week in Asia, with speculation rising that policymakers may be much closer to moving away from ultra-loose policy and negative interest rates than previously thought.

Rate decisions and guidance from Taiwan, the Philippines, and Indonesia on Thursday will also be closely scrutinized, while the latest inflation figures from Japan, Malaysia, and Hong Kong are on tap this week too.

Wall Street’s gloomy end to last week – the three main indexes fell between 0.83% and 1.56% on Friday – will cast a shadow over the Asia open on Monday, even though Asian markets ended the week on a far more positive note.

The MSCI Asia ex-Japan Index rose on Friday, lifted by surprisingly strong Chinese retail sales and industrial production figures, ensuring a decent 1.2% rise on the week. That is the third weekly rise in four.

But the steady grind higher in oil prices to new highs for the year is stoking inflation concerns, just as central banks in most developed economies are at or approaching the end of their tightening cycles. Stagflation fears are rising.

After the European Central Bank’s fireworks last week, the euro will be closely watched as a signal for whether the backlash from more hawkish ECB members is gaining any traction with traders and investors.

The euro has weakened for the last nine weeks, its longest losing streak ever. The 5% decline over that period is modest relative to other multi-week spells of depreciation, but nine weeks is still record-breaking. A period of consolidation and reversal is surely imminent.

The flip side of that run – which has more far-reaching implications and affects Asia more – is the dollar has strengthened nine weeks in a row, its longest-best run since 2014.

Again, time for a snap back?

Attention this week turns to the Federal Reserve and Bank of England policy meetings, and in Asia, the BOJ on Friday.

BOJ Governor Kazuo Ueda’s hawkish remarks last weekend seem like a long time ago now. The yen has surrendered all its gains and on Friday slid to a new low for the year at almost 148.00 per dollar.

The 10-year Japanese Government Bond yield, on the other hand, closed on Friday around 0.72%, its highest close since December 2013. The currency and JGB markets are sending different signals, and both will be seeking more clarity from the BOJ on Friday.

Here are key developments that could provide more direction to markets on Monday:

– Singapore exports (August)

– China foreign minister Li visits Moscow

– ECB’s de Guindos and Panetta speak

(By Jamie McGeever; Editing by Diane Craft)