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TREASURIES-U.S. yields rise as market anticipates faster inflation

·3-min read

(Adds Treasury auction results) By Herbert Lash NEW YORK, Oct 21 (Reuters) - U.S. Treasury yields rose on Thursday as a tighter labor market pointed to a recovering economy that renewed questions about the pace of inflation and when the Federal Reserve will raise interest rates. Two key market measures of future inflation based on five-year and 10-year U.S. Treasury breakeven inflation rates jumped on Thursday, hitting highs last seen in 2012. Yields on U.S. Treasuries notes also rose, with the benchmark 10-year Treasury rising 4.5 basis points to 1.680%. The number of Americans filing new claims for unemployment benefits dropped to a 19-month low last week, pointing to a tightening labor market. Traders are in the process of reassessing their outlook on monetary policy as primary dealers fill out the Fed's survey of their market expectations, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC. People are worried the Fed's tightening process will begin earlier than policymakers' "dot-plot" of the future federal funds now suggests, especially with wages and inflation on the rise, Ricchiuto said. "It's this back and forth between is inflation really stronger? Is it getting wrapped up into prices and then wages and what does that imply for future inflation?," he said. "By the same token what does it imply for monetary policy and that's the kickback." Greater demand than anticipated in the $19-billion auction of five-year TIPS on Thursday illustrates the need for an inflation protection feature, said Jim Vogel, interest rate strategist at FHN Financial in Memphis, Tennessee. A combination of higher inflation expectations from more sources than previously were analyzed shows how expectations of the Fed's move on rates has rapidly changed recently, he said. "The big move in nominal rates in Treasuries is this growing idea that the Fed is going to raise rates twice next year and after that they’re going to raise faster than the dots implied just four or five weeks ago," Vogel said. The yield on the 30-year Treasury bond was up 2.3 basis points to 2.134%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 124.3 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 5.9 basis points at 0.434%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.897%. The 10-year TIPS breakeven rate was last at 2.659%, indicating the market sees inflation averaging about 2.6% a year for the next decade. The U.S. dollar 5 years 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 2.591%. October 21 Thursday 2:31PM New York / 1831 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0575 0.0583 0.002 Six-month bills 0.06 0.0609 0.005 Two-year note 99-165/256 0.4343 0.059 Three-year note 99-146/256 0.7711 0.069 Five-year note 98-100/256 1.2116 0.065 Seven-year note 98-72/256 1.5118 0.058 10-year note 96-32/256 1.6798 0.045 20-year bond 94-68/256 2.1054 0.024 30-year bond 97-16/256 2.1336 0.023 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 16.50 -0.50 spread U.S. 3-year dollar swap 14.25 -0.25 spread U.S. 5-year dollar swap 7.00 0.00 spread U.S. 10-year dollar swap 0.75 0.00 spread U.S. 30-year dollar swap -22.75 0.25 spread (Reporting by Herbert Lash, Editing by Nick Zieminski)

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