U.S. yields rise in choppy week with inflation, Fed meeting in focus

U.S. Treasury yields advanced on Thursday, in a week that has seen rates veer between gains and losses and trading lacking conviction, as investors await reports on inflation and the Federal Reserve's monetary policy meeting next week.

U.S. yields slightly extended gains after data showed initial jobless claims modestly rose last week. Continuing unemployment claims, however, jumped to 1.671 million for the week, a 10-month high, which suggested the labor market is deteriorating.

The bond market overall expects rates to trend lower on expectations inflation will ease and the Fed will slow the pace of its rate hikes, as indicated by Chair Jerome Powell on Nov. 30, following big increases in the last several meetings.

Thursday's rise in yields was a blip in the U.S. rate downtrend, analysts said.

U.S. producer price numbers are due for release on Friday, while the consumer price index will be out on Tuesday, the day before the Fed announces its policy decision. Both numbers will be scrutinized for clues on how high the policy fed funds rate could go.

The market on Thursday has priced in the Fed's terminal rate, or the peak rate at which the Fed will stop hiking, at 4.94% expected to be reached at the May meeting next year.

A closely watched part of the U.S. Treasury yield curve, measuring the gap between yields on two- and 10-year Treasury notes, (US2US10=TWEB) narrowed its inversion to -82.5 basis points (bps), after widening to -85.2 bps on Wednesday, the most in two weeks.

That curve's inversion was at -85.7 more than two weeks ago and anything deeper than that would be the most since at least 1999. An inversion of this yield curve is typically a precursor to recession.

Some analysts believe the decline in yields and the sharp inversion seemed excessive.

"It comes down to economic growth concerns that are a little bit overblown at this point. We think the economy is going to have below potential growth next year, as opposed to an outright decline," said Zachary Griffiths, senior investment grade strategist at CreditSights.

"We have seen some encouraging signs on the consumer side and we also think the Fed isn't going to hike the policy rate quite as high as the market expects. So the risk of a policy-driven recession is a bit overpriced and you're seeing that in the curve," he added.

In afternoon trading, the yield on 10-year Treasury notes US10Y was rose 8.9 bps to 3.497%.

U.S. 30-year yields (US30YT=RR) were up 4.1 bps at 3.455%.

At the shorter-end of the curve, U.S. two-year yields (US2YT=RR), which typically reflect interest rate expectations, were up 6.2 bps at 4.318%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) (USBEI5Y=RR) rose to 2.405%, from 2.380% in the previous session. This rate suggests inflation will average around 2.4% over the next five years.

The 10-year TIPS breakeven rate (USBEI10Y=RR) was last at 2.304%, up from Wednesday's 2.274%.

The Fed is widely expected to hike rates by 50 basis points next week.

"Powell may say something that bullish Treasury investors may like and the rally (in Treasuries) may get some legs heading into 2023," said Jim Barnes, director of fixed income, at Bryn Mawr Trust in Berwyn, Pennsylvania.

December 8 Thursday 3:26PM New York / 2026 GMT