US yields climb as investors gauge Fed path while China reopens

NEW YORK, Dec 27 (Reuters) – The yield on the benchmark US 10-year Treasury note rose on Tuesday, as investors tried to assess the path of interest rate hikes from the Federal Reserve as China continues to scale back its COVID-19 restrictions.

China said it would stop requiring inbound travelers to go into quarantine from Jan. 8, the National Health Commission (NHC) said late on Monday, a major step towards loosening its curbs.

After hitting a near three-month low on Dec. 7 as hopes grew the Fed would signal an end to its rate hike cycle was on the horizon, the 10-year yield has steadily climbed. It saw its biggest weekly rise in 8-1/2 months last week on the heels of policy announcements from the US central bank, Bank of England and European Central Bank (ECB).

Investors have been trying to determine how high the Fed will need to raise rates as it tightens policy in its continuing battle against high inflation, while also trying to avoid tilting the economy into recession.

The yield on 10-year Treasury notes was up 10.4 basis points at 3.851% after hitting a five-week high of 3.862%.

“It is pretty likely that rates will continue to climb higher as the market sort of digests this huge supply of Treasuries that now is being put onto the private sector,” said John Luke Tyner, fixed income analyst at Aptus Capital Advisors in Fairhope, Alabama.

“Long story short, in the short term we will see rates trade on the recession theme on the long end and basically what the Fed is expected to do on the front-end, and until we get some new data it is going to be hard to break out of that range.”

The yield on the 30-year Treasury bond was up 11.5 bps at 3.937%.

Analysts also cautioned it was difficult to extrapolate any concrete direction given the limited trading activity around the holidays.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was
up 7.7 bps at 4.400%.

Shorter-dated bonds saw their yields fall from their highs of the day after an auction of USD 42 billion in two-year notes, which was viewed as strong by analysts, with a high yield of 4.373% and demand for the debt at 2.71 times the notes on sale.

Forecasts by the central bank see the fed funds rates climbing above 5% next year, while Fed Chair Jay Powell and other Fed officials have emphasized there may be a need to keep rates at a higher level for longer to completely stamp out inflation.

On the economic front, data showed the advance goods trade deficit for November narrowed to USD 83.35 billion from the prior month’s USD 98.8 billion, while a separate report pointed to continued struggles for the housing market as home prices fell under rising mortgages rates.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 55.1 bps.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.37%, after closing at 2.229% on Friday.

(Reporting by Chuck Mikolajczak; Editing by Tomasz Janowski and Nick Macfie)