September 14, 2018 / 3:21 PM / 8 days ago

TREASURIES-Solid data, hawkish Fed push 10-year yield above 3 percent

(Recasts headline, first paragraph, updates rates; adds analyst quotes, inflation news)

By Kate Duguid

NEW YORK, Sept 14 (Reuters) - The 10-year U.S. Treasury yield broke above the important technical level of 3 percent on Friday following an upward trajectory through the week on solid economic data and signs the Federal Reserve is likely to raise interest rates another two times in 2018.

Higher interest rates create lucrative investment opportunities beyond the Treasury market, pushing demand for - and prices of - Treasuries downward. In morning trade, the benchmark government yield rose to a high of 3.003 percent, passing the 3 percent mark for the first time since Aug. 2.

On Friday morning Chicago Fed President Charles Evans delivered a message that was viewed as more hawkish than previous statements, saying interest rate hikes would begin to weigh on the U.S. economy next year and that it was normal. He added that it was premature to read too much into the flattening yield curve.

As recently as this spring, Evans had argued the Fed should stop raising rates so as to allow inflation to rise to 2 percent.

“It’s all part and parcel of the more hawkish take you’ve seen out of the Fed this week. Evans this morning punctuates that. This is a guy who has traditionally been on the dovish side on the spectrum - he’s now seemingly in the consensus,” said Jacob Oubina, senior economist at RBC Capital Markets.

Evans’ comment follows a hawkish speech from another traditional dove, Fed Governor Lael Brainard. On Wednesday, Brainard said the central bank had room to raise interest rates over the next few years without slowing economic growth, suggesting monetary policy would likely continue to tighten for some time.

Also on Friday, data showed U.S. retail sales recorded their smallest gain in six months in August, but upward revisions to July data likely kept intact expectations of strong economic growth in the third quarter.

“Although August was a little weaker, if you look at the back month revisions, it more than made up for that. So the Street is going to be taking up their third-quarter GDP estimates on the back of this,” said Oubina.

A September rate hike has been almost fully priced in by the market, with trader expectations at 95 percent, according to CME Group’s FedWatch tool. Expectations of a December hike rose to 78.4 percent from 77.2 percent a week ago.

Yields were up across the curve, with the two-year yield last at 2.778 percent and the 30-year yield last at 3.130 percent.

Reporting by Kate Duguid Editing by Chizu Nomiyama and Dan Grebler

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