Yields hold near August highs; Fed meeting in focus

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)