US long-dated yields rise to multi-month highs on inflation view; curve steepens
US 10-year yields hit fresh 6-1/2-month high
US 30-year yields rise to highest since early May
US 2/10 yield curve steepens, widest gap in more than two years
US rate futures price in one to two cuts in 2025
US five-year TIPS auction shows soft demand
Adds new comment, five-year TIPS auction, updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 19 (Reuters) -U.S. Treasury yields were mixed on Thursday, with the long end hitting multi-month highs, after another round of generally solid economic data a day after the Federal Reserve flagged a slower pace of easing next year.
The Fed cut interest rates by 25 basis points (bps),but Chair Jerome Powell said further reductions in borrowing costs hinge on progress in lowering stubbornly high inflation. The benchmark policy rate is now down to the 4.25%-4.50% range.
The U.S. central bank alsoreleased its "dot plot" interest-rate projections on Wednesday, which showed policymakersanticipate just two reductions of 25 bps each by the end of 2025. That was half a percentage point less in policy easing next year than officials anticipated in September.
U.S. rate futures have priced in just 37 bps of rate easing in 2025, or between one and two cuts, LSEG calculations showed. The earliest rate cut is seen in the June meeting, with a 65% probability.
In afternoon trading, the U.S. yield curve steepened, with the spread between two- and 10-year yields US2US10=TWEB hitting 27.6 bps, the widest gap since June 2022. The curve was last at 25.3 bps, compared with 15.5 bps late on Wednesday.
Analysts said the steepening reflected bearishness atthe long end, withexpectations forinflation to resurge next year, and thatthe burgeoning U.S. fiscaldeficit will have to be funded by more Treasury debt issuance.
The curve initially flattened after the Fed's hawkish outlook on policy rates and inflation. The flattening suggested that withthe Fed set to slow the pace of rate cuts, the two-year yield has a little more room to rise.
The U.S. 10-year yield US10YT=RR hit its highest since late May at 4.594%. It was last up 7.6 bps at 4.574%, after jumping more than 11 bps on Wednesday.
"The moves were pretty drastic to me," said Vinny Bleau, director, fixed income capital markets, at Raymond James in Memphis.
"I definitely think that we're a little oversold here, especially with PCE (personal consumption expenditures) tomorrow. This upmove we have seen since early December with the lowest around 4.18% in the 10-year seems a little sharp. I look for us to come back ... and retest 4.30%," he added.
The PCE price index, the Fed's preferred inflation measure, is due out on Friday and is expected to show that headline and core prices each rose 0.2% in November, for an annual gain of 2.5% and 2.9%, respectively. USPCE=ECI
In other maturities, the U.S. 30-year yield also advanced, to 4.775%, the highest since early May. It was last up 7.6 bps at 4.737% US30YT=RR.
On the front end of the curve, the two-year yield, more sensitive to the policy-rates outlook, fell 4.1 bps to 4.314% after hitting a new three-week high the day before US2YT=RR.
Thursday's economic data also helped lift yields on the long end. Initial jobless claims fell more than expected, dropping 22,000 to a seasonally adjusted 220,000 for the week ended Dec. 14.
Other data on Thursday showed theeconomy grew faster than previously estimated in the third quarter, driven by robust consumer spending. Gross Domestic Product increased at an upwardly revised 3.1% annualized rate, the data's third estimate for third-quarter GDP showed.
Even with inflation seen re-accelerating next year, the Treasury's auction of $22 billion in five-year Treasury Inflation-Protected Securities (TIPS) underwhelmed on Thursday. The auction priced at2.121%, above the rate at the bid deadline, suggesting investors sought a premium to absorb the note.
Bids totaled $46.3 billion for a2.10 bid-to-cover ratio, a gauge of demand, less than the previous cover of 2.40 and the 2.50 average.
The U.S. five-year TIPS yield advanced to a more than five-month high of 2.134% after the auction, and was last up 9 bps at 2.103% US5YTIP=RR.
"There's latent inflation in the labor market which has not really caught up yet, and meanwhile, the Fed is cutting rates," said Jay Menozzi, chief investment officer and portfolio manager at Orange Investment Advisors.
"A lot of people would argue that the four rate cuts (one 50-bp and two 25-bp cuts) that already occurred were not justified. When the tide turned on the people's economic outlook around the U.S. presidential election, the Fed did not really adjust to that. So those cuts are going to stoke inflation."
U.S. interest rate decisions https://reut.rs/495FO8a
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Stefano Rebaudo in Milan; Editing by Alun John, Rod Nickel and Richard Chang
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