NEW YORK - Treasury yields rose further on Wednesday after producer price data, coupled with consumer prices the day before, show that inflation is becoming sticky and suggest the Federal Reserve will keep aggressively tightening monetary policy.
The two-year U.S. Treasury yield, a bellwether for interest rate expectations, rose another 3.2 basis points to 3.788% after jumping 18.5 bps on Tuesday following consumer price data that did not show inflation had peaked as expected.
Expectations now call for Fed policymakers to hike interest rates by least 75 basis points next week, with fed fund futures showing a 37% chance they will raise rates by 100 bps at the end of their two-day meeting on Sept. 20-21.
"The big picture coming through in all these readings right now is how sticky inflation is," said Dec Mullarkey, managing director at SLC Management in Wellesley Hills, Massachusetts.
"The Fed will have to be more persistent in terms of rate increases and go deeper on those, and probably that's going to take longer and therefore you're raising the risk of a recession," he said.
U.S. producer prices fell for second straight month in August as energy prices declined further. The producer price index for final demand dipped 0.1% after slipping 0.4% in July, the Labor Department said.
In the 12 months through August, the PPI increased 8.7% after a 9.8% rise in July. Stickier prices continue to rise rapidly and will keep inflation elevated in 2023, said Bill Adams, chief economist for Comerica Bank in Dallas.
The longer inflation stays high, the more the Fed will raise rates and the more likely the central bank will push the U.S. economy into a recession, Adams said in email commentary.
The gap between yields on two- and 10-year Treasury notes, seen as a recession warning when thcurved curven inverts, widened to -36.6 basis points.
A week ago the gap had narrowed to -13.0 bps. The yield on 10-year notes was up 0.1 basis point to 3.424% and was down 1.4 basis points to 3.494% on the 30-year bonds.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.672%. The 10-year TIPS breakeven rate was last at 2.468%, indicating the market sees inflation averaging almost 2.5% a year for the next decade.
The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.471%.
(Reporting by Herbert Lash; editing by Jonathan Oatis)