U.S. 10-year note flirts with 3% yield after German inflation scare

U.S. 10-year note flirts with 3% yield after German inflation scare

By Davide Barbuscia

NEW YORK, Aug 19 (Reuters) - U.S. Treasury yields rose on Friday with the benchmark 10-year note nearly hitting 3% after Germany reported record-high increases in monthly producer prices, which are seen as a leading indicator for inflation.

Producer prices in July in Germany - the euro zone's leading economy - leapt 37.2% from the same time last year and 5.3% from June, mainly because of rising energy costs.

German bond yields surged, with the 10-year yield DE10YT=RR hitting a four-week high, as the data was seen as reinforcing fears of "stagflation" - a combination of high inflation and low growth.

"The epicenter of the backup in bond yields is coming from Europe," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. "The German PPI (Producer Price Index) is causing European yields to rise, and that's rippling across global bond yields."

The U.S. benchmark 10-year Treasury yield US10YT=RR , an important barometer for mortgage rates and other financial instruments, rose about 10 basis points from its close on Thursday to a month high of 2.988%. It hit an intraday high of about 2.998%, just shy of the 3% threshold it crossed in May for the first time since 2018 as investors worried about the U.S. Federal Reserve's plan to tighten monetary conditions.

The five-year note yield US5YT=RR climbed to 3.114%, a new one-month high, while the two-year US2YT=RR climbed to 3.265%, faring better than longer-dated bonds.

The rising pressure in yields offset a rally on Thursday, which was partly due to investors getting some relief from the minutes of the Fed's July 26-27 policy meeting. The minutes, which were released on Wednesday, were seen by many as confirming a less aggressive stance in the U.S. central bank's fight against inflation.

A string of Fed officials on Thursday said the central bank needs to keep raising borrowing costs to bring high inflation under control, even as they debated how fast and how high to lift them.

The comments, however, were no smoking gun for Treasury yields, with investors now likely to be looking for direction from Fed Chair Jerome Powell when he addresses the annual global central banking conference in Jackson Hole, Wyoming, on Aug. 26.

The Fed has raised its benchmark overnight interest rate by 225 basis points since March and is expected to raise its policy rate by another 50 or 75 basis points at its next meeting on Sept. 20-21 as it seeks to counter four decade-high inflation.

The rapid tightening of financial conditions, however, has led investors to weigh inflation concerns against recessionary fears, with markets fluctuating between the two.

Richmond Federal Reserve President Thomas Barkin said on Friday the Fed's efforts to control inflation could lead to a recession, but that it needn't be a "calamitous" decline in economic activity.

The closely watched yield curve between two- and 10-year notes US2US10=TWEB , which has been inverted since early July, was at minus 27.8 basis points on Friday, its smallest inversion since Aug. 1. It reached minus 56 basis points on Wednesday last week, the deepest inversion since 2000.

An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12 to 18 months.

August 19 Friday 3:00PM New York / 1900 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.6325

2.6861

0.017 Six-month bills US6MT=RR

3.0275

3.1162

0.023 Two-year note US2YT=RR

99-129/256 3.2653

0.030 Three-year note US3YT=RR

99-136/256 3.2912

0.044 Five-year note US5YT=RR

98-88/256

3.114

0.083 Seven-year note US7YT=RR

97-58/256

3.0716

0.100 10-year note US10YT=RR

97-244/256 2.9887

0.109 20-year bond US20YT=RR

98-208/256 3.4578

0.095 30-year bond US30YT=RR

95-176/256 3.2255

0.085

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

34.50

-0.25

spread

U.S. 3-year dollar swap

11.75

0.00

spread

U.S. 5-year dollar swap

3.00

0.00

spread

U.S. 10-year dollar swap

5.00

0.50

spread

U.S. 30-year dollar swap

-32.25

0.25

spread


Reporting by Davide Barbuscia; Editing by Paul Simao and Jonathan Oatis