US yields rise as 10-years set for biggest annual gain in decades

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NEW YORK – The benchmark 10-year U.S. Treasury yield rose on Friday and was poised to close the trading year with its biggest annual gain in decades as the Federal Reserve embarked on a path to a tightening of its policy to combat inflation.

The 10-year has risen about 239 basis points this year, its biggest annual rise since at least 1953, according to Refinitiv data, as the U.S. central bank raised interest rates at its fastest pace since the 1980s to fight stubbornly high inflation after years. a flexible monetary policy.

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“Bond investors are bidding a less warm farewell to 2022 as they look forward to a much more attractive 2023,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors in Minneapolis.

“While equities will grapple with slowing economic activity and the loss of inflated earnings to inflation, bonds are earning a decent income with the potential for price appreciation as yields dip from their peak. «

The yield on 10-year Treasury bills rose 5.5 basis points to 3.890%.

After hitting a nearly three-month low on Dec. 7 as hopes grew that the Fed would signal that the end of its rate hike cycle was on the horizon, the 10-year yield has steadily risen on policy announcements. from the US central bank, the Bank of England and the European Central Bank earlier this month, hitting a six-week high of 3.892% on Wednesday.

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The U.S. central bank’s forecast calls for federal funds rates to climb above 5% next year, while Fed Chairman Jay Powell and other Fed officials have said he may need to keep rates higher for longer to fight inflation.

The 30-year Treasury bond yield rose 5.5 basis points to 3.978%.

Analysts, however, warned that it was difficult to overemphasize market direction this week given limited trading activity over the holidays.

A closely watched part of the US Treasury yield curve measuring the spread between two- and 10-year Treasury yields, seen as an indicator of economic expectations, was at a negative 53.1 basis points. . A reversal is considered by many to be a signal of recession.

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The two-year US Treasury yield, which generally moves in line with interest rate expectations, rose 5 basis points to 4.418%. The two-year has jumped about 369 basis points this year and was expected to see its biggest annual increase since it began regular issuance in 1972.

The break-even rate for five-year US Treasury inflation-protected securities (TIPS) last stood at 2.369%, after closing at 2.375% on Thursday.

The 10-year TIPS break-even rate was last at 2.282%, indicating that the market expects inflation to average 2.3% per year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Barbara Lewis)