US yields rise following comments from the Fed on the economic outlook

U.S. 10-year Treasury yields rose on Friday after two consecutive sessions of declines, as investors assessed comments from a stream of Fed speakers and the positive outlook for the economy.US yields have risen steadily in recent weeks in parallel with global yields as many central banks have signaled they are at or near the end of their own easing cycles, while the Bank of Japan is widely expected to raise rates at its policy meeting next week. However, yields fell after the Federal Reserve announced a rate cut on Wednesday but signaled a likely pause in the near term as the Fed sees a recovery in economic growth next year.

The central bank also said it would start buying short-term government bonds on Friday to help manage market liquidity levels and ensure the central bank maintains firm control over its interest rate target system.
Multiple Fed officials commented at the recent policy meeting on their position as the blackout period ended. Those who voted against the rate cut expressed concern that inflation remains too high to justify a reduction in borrowing costs, especially in light of the lack of official data due to the prolonged government shutdown.

“The data is very mixed right now and these are individuals within the Fed with different projections and different thoughts on everything,” said Tony Welch, chief investment officer at SignatureFD in Atlanta.

“It’s the result of the tug-of-war between inflation and employment right now. And people just have different perspectives on it.” The yield on the US 10-year Treasury note rose 4.5 basis points to 4.186% and is up almost 5 basis points this week, putting yields on track for a second straight weekly rise.

Two-year U.S. Treasury yields, which typically keep pace with Fed interest rate expectations, rose 1.1 basis points to 3.541% and fell 2.5 basis points this week. A closely watched part of the U.S. Treasury yield curve, which measures the difference between two- and 10-year Treasury yields, seen as an indicator of economic expectations, was at a positive 64.3 basis points after reaching a level of 65.3, the widest since April 21. The curve showed a bear-steepener situation, with the rise in long-term rates outpacing that of short-term rates, reflecting market expectations for higher economic growth and continued inflation. “What’s happening is we’re revising prices that the economy will be in pretty good shape next year and so that’s one of the ways you can get a steeper curve,” Welch said.The yield on the 30-year bond rose 5.9 basis points to 4.849% and is up nearly 6 basis points this week, on track for a second straight weekly increase. Many market participants expect a boost to economic growth next year as President Donald Trump’s massive tax cut and spending bill take effect.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) last stood at 2.325%, after closing at 2.32% on Thursday, the lowest level in a week. The 10-year TIPS breakeven rate was last at 2.272%, indicating that the market expects inflation to average 2.3% per year over the next decade.