October 12, 2018 / 7:12 PM / 6 days ago

TREASURIES-U.S. yields inch higher as stocks stage rebound

    * U.S. 10-, 30-year yields on track for weekly fall 
    * Univ. of Michigan 5-year inflation outlook falls in Oct
    * U.S. 10-year yield between 3 pct-3.25 pct unsustainable
-analyst

 (Adds new comment, updates prices, table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Oct 12 (Reuters) - U.S. Treasury yields edged
higher on Friday, rising from the previous session on Wall
Street's selloff, as equities recovered globally and investors
unwound safe-haven bids. 
    Some market participants were, however, skeptical that rates
could go higher again as quickly as they did last week.
    Yields on both the benchmark U.S. 10-year notes and 30-year
bonds have fallen 9 basis points this week, on track for their
largest weekly fall in nearly five months.
    After a two-day rout, shares on Wall Street were higher,
although some analysts said Friday's gains do not mean that the
turbulence is over.
    U.S. stocks sold off this week, hurt by the prospect of
rising rates.
    "We're sure the Fed is paying close attention to the equity
rout," said John Taylor, president of macro research firm Taylor
Global Vision in New York. "For now, it's sit back and watch.
But the Fed has got be anxious."
    "More of this nasty environment and there is no hike in
December," he added, noting that a persistent sell-off focuses
the debate on the timing of the next rate cut.
    In afternoon trading, U.S. 10-year note yields were at 3.140
percent, slightly up from 3.131 percent late
Thursday.
    U.S. 30-year bond yields rose to 3.315 percent,
from Thursday's 3.305 percent. 
    On the short end of the curve, U.S. two-year yields were at
2.836 percent.
    "The market will definitely re-test the highs in yields, but
I don't know how high they can go," said Lou Brien, market
strategist at DRW Trading in Chicago, "I don't think they can go
much higher."
    Brien believes that a U.S. 10-year yield between 3.0 to 3.25
percent would be unsustainable. 
    "The long-end moves to the beat of inflation and inflation
expectations, and those are relatively low and well-anchored,"
said DRW's Brien. 
    For instance, the University of Michigan consumer sentiment
report on Friday showed a preliminary index for October of 99,
slightly lower than expectations. But more importantly, the
five-year inflation outlook component of the survey, a key
measure that the Fed looks at, was at 2.3 versus 2.5 in
September.
    Jon Hill, rates strategist, at BMO Capital Markets in New
York said that the 2.3 reading on inflation outlook was tied for
the lowest level on record.
     "With (Fed Chair Jerome) Powell's focus on series such as
this as a 'key' input for monetary policy, this will serve as a
dovish talking point, and help keep long tenor yields in check,"
Hill said. 
    The University of Michigan report followed U.S. data on
Thursday that also showed tame inflation: a weaker-than-expected
rise in U.S. consumer prices for September in both the headline
and core number.
    
      October 12 Friday 2:58PM New York / 1858 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.2275       2.2707    0.005
 Six-month bills               2.38         2.4418    0.000
 Two-year note                 99-212/256   2.8405    0.001
 Three-year note               99-218/256   2.927     0.000
 Five-year note                99-116/256   2.9943    0.007
 Seven-year note               99-124/256   3.0828    0.010
 10-year note                  97-196/256   3.1406    0.010
 30-year bond                  94-12/256    3.3156    0.011
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        19.25         0.25    
 spread                                               
 U.S. 3-year dollar swap        16.75         0.50    
 spread                                               
 U.S. 5-year dollar swap        12.25        -0.50    
 spread                                               
 U.S. 10-year dollar swap        4.25        -0.50    
 spread                                               
 U.S. 30-year dollar swap      -10.50         0.00    
 spread                                               
 
    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jeffrey
Benkoe and Nick Zieminski)
  
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