Ten-year yields hit 16-year highs as oil prices gain

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)