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Two-year yields highest since 2008 as inflation soars

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NEW YORK — U.S. Treasury prices tumbled

and short- and intermediate-dated yields reached their highest

levels in over a decade on Friday after data showed that U.S.

consumer prices soared in May.

The consumer price index increased 1.0% last month after

gaining 0.3% in April, as gasoline prices hit a record high and

the cost of food jumped.

“It’s tough to find any solace in this inflation report,”

said Gennadiy Goldberg, a senior rates strategist at TD

Securities in New York.

“The fact that we continue to see strong inflation prints is

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going to keep the Fed thinking that more 50 basis points hikes

could be on the cards,” Goldberg said.

Two-year yields, which are highly sensitive to

interest rate hikes, spiked to 3.007%, the highest since June

2008. Benchmark 10-year yields reached 3.152%, the

highest since May 9.

Three-year yields also jumped to their highest

levels since Dec. 2007 and five-year yields were the

highest since Sept. 2008 as traders priced in more aggressive

rate hikes by the Federal Reserve and a higher terminal rate.

The U.S. central bank is expected to hike rates by 50 basis

points when it meets next week, with a further 50 basis point

increase priced in for July and a strong chance of a similar

move in September.

Goldman Sachs said on Friday that it now expects the Fed to

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hike rates by 50 basis points in September, up from its previous

expectation of a 25 basis point increase.

Analysts at Barclays were even more aggressive, saying that

they expect the Fed will raise rates by 75 basis points next

week.

“We think the US central bank now has good reason to

surprise markets by hiking more aggressively than expected in

June,” the Barclays analysts said.

Fed funds futures traders expect the Fed’s benchmark rate to

increase to 3.58% next May, from 0.83% now.

The closely watched two-year, 10-year Treasury yield curve

flattened as far as 11 basis points, from 22

basis points before the data.

Parts of the yield curve also reinverted, with the

three-year/10-year and five-year/30-year portions inverting for

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the first time since May 4. Three-year to seven-year yields are

all trading above those on 10-year notes.

“The market expects the Fed to be aggressive, and what comes

with that is a higher risk of a recession and a higher risk of

the curve inverting,” said Goldberg.

Inflation expectations also rose. Breakeven rates on

five-year Treasury Inflation-Protected Securities (TIPS), which

reflect expected average annual inflation for the next five

years, increased to 3.16%, from 3.11% on Thursday.

June 10 Friday 11:43AM New York / 1543 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.31 1.3324 0.058

Six-month bills 1.9175 1.9627 0.155

Two-year note 99-18/256 2.9905 0.174

Three-year note 99-42/256 3.1693 0.165

Five-year note 97-82/256 3.2131 0.148

Seven-year note 97-32/256 3.2139 0.129

10-year note 97-176/256 3.148 0.106

20-year bond 96-228/256 3.4673 0.066

30-year bond 93-80/256 3.225 0.055

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 37.50 0.25

spread

U.S. 3-year dollar swap 18.25 -0.50

spread

U.S. 5-year dollar swap 4.00 -1.50

spread

U.S. 10-year dollar swap 6.00 -0.75

spread

U.S. 30-year dollar swap -24.00 -1.25

spread

(Editing by Barbara Lewis, Kirsten Donovan)

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