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March 24 (Reuters) – U.S. Treasuries resumed a sell-off on Thursday, driving bond yields higher, after fresh data added to fears that high inflation will keep the Federal Reserve on track to combat rising prices with a series of interest rate hikes.
The number of Americans filing new claims for jobless benefits dropped to a 52-1/2-year low last week and unemployment rolls continued to shrink, signs of a tight labor market that will keep boosting wage inflation.
Comments seen as decidedly hawkish from Federal Reserve chief Jerome Powell on Monday triggered a sell-off that pushed yields to multiple-year highs. Bond prices move inversely to their yield.
The yield on 10-year Treasury notes rose 2.3 basis points to 2.344%, slowing a torrid jump earlier this week.
Neel Kashkari, president of the Minneapolis Fed, told a business conference on Thursday he has penciled in seven quarter-point interest rate hikes this year to help rein in high inflation, but warned against going too far.
“There’s a danger to overdoing it,” Kashkari said, if pandemic-snarled supply chains get fixed faster than expected or workers return to the labor force in bigger numbers.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes was at 22.2 basis points. A yield curve inversion, when short-term rates rise above the yield of longer-term rates, often indicates a recession is near.
But higher rates for shorter-term debt also suggests faster inflation won’t persist. Past the short term, inflation will begin to abate, said Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC.
“The bond market is definitely in the transitory camp,” Davis said. “It’s a bizarre time where you have the Fed tightening, the bond market saying inflation is not going to pick up and then equities are just carrying on.”
The market has priced in about eight rate hikes into next year, but that many ultimately are unlikely to emerge, said Guy LeBas, chief fixed income strategy Janney Montgomery Scott LLC.
“Nonetheless, that has an effect on interest rates across the curve,” LeBas said.
The recent rise in real, or inflation-adjusted, U.S. interest rates has been correlated in large part with the move into positive territory of German yields, LeBas said.
“You can trace a lot of the move, particularly in real yields, to what’s going on in Europe,” he said.
The Treasury sold $14 billion of 10-year inflation-protected TIPS securities <US10YTIP=RR) to yield -0.589%.
The yield on the 30-year Treasury bond fell 1 basis points to 2.510%
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 0.9 basis point to 2.122%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.55%.
The 10-year TIPS breakeven rate was last at 2.968%, indicating the market sees inflation averaging almost 3% a year for the next decade.
The U.S. dollar 5 year forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.564%. (Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe, Bernadette Baum and Jonathan Oatis)
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