US yields rise as focus falls on tonight’s Federal Reserve decision
US government debt extended declines as a report showed core inflation rose in November.
Yields rose as German government bunds dropped for a second day along with Italian debt while stocks rallied.
Federal Reserve policy- makers finish a two-day meeting today, and futures contracts show traders expect the Fed to raise interest rates for the first time in almost a decade.
The announcement is due at 7pm Irish time this evening. A report showed core consumer prices rose 0.2% for a third straight month.
The inflation number bolsters the case that the Fed will raise rates, said Sean Simko, who oversees $8bn (€5.46bn) at SEI Investments in Pennsylvania.
Benchmark Treasury 10-year notes have about turned in recent days amid volatility in oil prices and high-yield credit markets.
With policymakers expected to raise rates, speculation has turned to whether US economic readings will support additional increases next year.
A bond-market gauge showed expected annual inflation over the next decade rose for the first time in five days to 1.53%, below the Federal Reserve’s 2% target.
The 10-year yield rose five basis points, or 0.05 percentage points, to 2.27% at one stage yesterday.
The probability that traders assign an increase from the Fed at today’s meeting is 78%, according to futures data.
The calculation is based on the assumption that the effective federal funds rate will average 0.375% after lift-off, compared with the current range of zero to 0.25%.
Germany’s 10-year bund yield jumped seven basis points to 0.64%, pushing its two-day increase to 10 basis points. Italy’s 10-year bond yield rose four basis points to 1.68%.
“Bund yields are moving up quite a bit — we’re getting dragged along”, said Aaron Kohli, a fixed-income strategist at Bank of Montreal, one of 22 primary dealers that trade with the central bank.
The wider US consumer-price index was unchanged in November after a 0.2% gain in October, Labor Department figures showed yesterday. Excluding volatile food and fuel, the so-called core measure rose 0.2%.
Traders are pricing in less than three Fed increases of 0.25% in the next year, taking the Fed funds effective rate to 0.76% from 0.14%.
“The risk is they’ll be a little more doveish because of the moving pieces that are happening right now, and the ancillary impacts within the high-yield market and credit spreads in general,” Mr Simko said.
