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Treasury Two-Year Yields Head for 4% Ahead of Big Fed Rate Hike

·2 min read

(Bloomberg) -- Two-year Treasury yields are poised to crack above 4% for the first time since 2007, lifted by the Federal Reserve’s steepest tightening cycle in a generation.

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The yield on the benchmark note rose as much as 5 basis points to 3.99% on Tuesday. It’s up more than 3 percentage points this year as it heads for the biggest annual increase since 1994.

The Fed will likely hike its benchmark interest rate by three-quarters of a point on Wednesday for a third consecutive meeting, according to the median estimate in a Bloomberg survey of economists. Two of the 96 analysts surveyed are predicting a full-point move.

“We are seeing clear signs that central banks are not about to ‘blink’ and are prepared to tolerate recession, if that is the price they need to pay to bring inflation under control, and this means higher short-end yields, globally,” said Andrew Ticehurst, a rates strategist at Nomura Inc. in Sydney.

Treasuries have sold off almost without pause since stronger-than-expected US inflation data last week dashed speculation that cost pressures had peaked. As Fed Chair Jerome Powell has signaled his commitment to quashing inflation, two-year notes -- the most sensitive to policy moves -- have led declines.

That tone shifted on Tuesday, with selling during New York trading being led by the 10-year note, whose yield rose as much as 10 basis points to 3.59%, its highest since 2011. The 30-year yield climbed as much as 9 basis points to 3.6%, the highest since 2014. Traders await a $12 billion, 20-year bond sale at 1pm.

The Global Race to Hike Rates Tilts Economies Toward Recession

In the US, real yields were also higher. The 10-year inflation-protected Treasury yield rose as much as four basis points to 1.18% on Tuesday, its highest since 2011. Investors of TIPS receive additional income to offset increases in consumer prices.

“I’m a short-term bear on Treasuries –- I think yields will head higher across the curve until the Fed stops hiking,” said Vimal Gor, Trovio Group’s chief investment officer. “Then way before they start cutting rates I think you’ll see a material rally in bonds. After years of people ignoring government bonds, they’re becoming more relevant again now.”

The spread between US two-year and 10-year notes eased to about 40 basis points. The difference had reached 58 basis points on Aug. 10, the deepest inversion since the 1980s.

During that era, then Fed Chair Paul Volcker raised rates to as high as 20% to tame inflation. Powell evoked Volcker’s memory at last month’s Jackson Hole symposium as an example of the sort of determination that may be needed to rescue the economy from rampant price pressures.

(Updates with additional context, price moves.)

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