October 10, 2018 / 7:25 PM / 2 months ago

TREASURIES-Long-dated yields advance as U.S. data supports higher rate outlook

    * U.S. PPI rises in September, core gains as well
    * U.S. auctions show mixed results
    * Bond market playing catch-up to Fed rate forecasts
-analyst

 (Adds comment, auction results; updates prices, table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Oct 10 (Reuters) - U.S. long-dated Treasury yields
rose on Wednesday, extending a trend over the last few weeks
fueled by solid U.S. economic data that reinforced expectations
of multiple interest rate hikes over the next 12 months.
    Data on U.S. producer prices, which rose in September after
declining the previous month, added to the hawkish outlook on
interest rates as it suggested that inflationary pressures were
accelerating.
    The report showed producer prices gained 0.2 percent last
month, reversing an unexpected drop in August and in line with
expectations. More importantly, a key measure of underlying
producer price pressures that excludes food, energy and trade
services grew 0.4 percent, the largest increase since January.
    "The market for quite some time has under-appreciated the
Federal Reserve's rate hikes," said Bill Merz, head of fixed
income research at U.S. Bank Wealth Management in Minneapolis.
    "Despite the meaningful repricing last week of rate
expectations, that gap still has to be resolved. We expect the
market to continue to catch up, which is more likely than the
Fed lowering its rate path."
    Merz added that the disparity between the market's
expectation for rates and the Fed's forecast underpins a big
component of U.S. Bank's view that calls for rising yields
across the curve.
    Also on Wednesday, the Treasury held two key auctions with
fair to modest results - $36 billion in U.S. 3-year notes, and
$23 billion in reopened 10-year notes.
    The U.S. 3-year note sold at a yield of 2.989 percent, the
highest at an auction of this maturity since May 2007. The
bid-to-cover ratio, a measure of demand, was 2.56, which was the
lowest since July. The ratio was 2.68 at the previous 3-year
note sale in September.
    The U.S. 10-year note, on the other hand, picked up a yield
of 3.225 percent, the highest since May 2011. The bid-to-cover
ratio was 2.39, the lowest since February, while the ratio in
September was 2.58.
    In afternoon trading, the U.S. 10-year yields were last at
3.221 percent, up from 3.208 percent late on
Tuesday.
    In one of the swiftest market moves, the yield on the
10-year Treasury bond rallied from 3.07 percent to 3.22 percent
last week.
    "There's a decent chance that we will stall out here on the
10-year," said Jerry Paul, senior vice president and fixed
income portfolio manager at ICON Advisers in Denver. 
    "Maybe we're finding a new trading range. Maybe it's now
3.25-3.50 percent. But I would think that uptick would slow
down."
    U.S. 30-year yields were also higher at 3.394 percent
, versus Tuesday's 3.369 percent. 
    Post-auction, yields on U.S. 3-year notes were at 2.976
percent, down from 2.982 percent on Tuesday.
    
      October 10 Wednesday 3:01PM New York / 1901 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.23         2.2738    0.010
 Six-month bills               2.385        2.4476    -0.002
 Two-year note                 99-192/256   2.8812    -0.008
 Three-year note               99-94/256    2.9768    -0.005
 Five-year note                99-42/256    3.0574    0.000
 Seven-year note               99-4/256     3.1584    0.007
 10-year note                  97-24/256    3.2215    0.013
 30-year bond                  92-152/256   3.3966    0.028
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.25         0.25    
 spread                                               
 U.S. 3-year dollar swap        16.50         0.25    
 spread                                               
 U.S. 5-year dollar swap        12.25         0.00    
 spread                                               
 U.S. 10-year dollar swap        4.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -10.75        -0.75    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Chizu Nomiyama and Richard Chang)
  
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