US Treasury yields hit new highs on Dudley remarks

Posted on November 18, 2016

US Treasury yields jumped to new highs for the year after New York Federal Reserve president William Dudley said inflation expectations were “well-anchored” and that he was optimistic the central bank’s inflation target would be met in the “next few years”.

The benchmark 10-year Treasury yield hit its highest level since December 2015, rising to 2.35 per cent before falling slightly to 2.32 per cent. The US dollar also rose against the euro, British sterling and the Japanese yen, sending the dollar index to its highest level in more than 13 years.

Mr Dudley was speaking at the release of the New York Fed’s consumer expectations survey, which includes details on household inflation. Three-year consumer inflation expectations fell from 2.86 to 2.58 per cent between June and October but Mr Dudley said the recovery in the rate over the course of 2016, compared to 2015, confirms that inflation expectations are well-anchored.

“They certainly seem to be,” said Mr Dudley. “That combined with an economy that continues to grow above trend, that is generating respectable payroll gains, certainly is consistent with the notion that we should be increasingly optimistic that we will reach our inflation objectives over the next few years.”

Market gauges of inflation expectations have risen since June, and climbed sharply since Donald Trump’s election victory. Mr Dudley emphasised his preference for household inflation data due to other factors that cloud market-based inflation expectation measures, such as investor sentiment.

The 10-year break-even rate, an influential measure of market inflation expectations derived from comparing the yields of conventional and inflation-protected Treasuries, has climbed to a one-and-a-half year high of 1.97 per cent this week.

The rate has been propelled by expectations that Mr Trump will stimulate growth through expanding fiscal policy, including tax-cuts and infrastructure spending. Mr Dudley emphasised the need to make policy changes that expanded the productive capacity of the US economy.

“If you had fiscal stimulus that was tied to infrastructure spending, that infrastructure spending would presumably increase the efficiency and productivity of the economy and so I think that would certainly be a worthwhile undertaking,” he said.

Growing inflation expectations are cementing prospects that the US Federal Reserve will raise interest rates in December. Bond yields extended their gains from Thursday, when Fed chair Janet Yellen said an increase in short term rates could “become appropriate relatively soon”. Federal fund futures data point to a 98 per cent probability of a December rise.

The consumer expectations survey also showed a decline in consumers’ access to credit since June. There was an increase in the proportion of applicants being discouraged or rejected for credit between June and October, although the release notes that June’s reading was the lowest level for consumers being discouraged from accessing credit since the survey began in October 2013.

Rejection rates returned to levels last seen in February 2015 and were particularly high for credit cards. Between June and October, credit card rejections, and requests for higher credit card limits, increased from 15 to 18.6 per cent and from 16 to 31.3 per cent, respectively between June and October.

Mr Dudley was also questioned on president-elect Trump’s intimations that he will rollback some post-crisis financial regulation, pointing the finger at the 2010 Dodd Frank Act.

“I think it would be a big mistake to go back to the pre financial crisis set of regulations that we had in place,” said Mr Dudley. “That said, is Dodd Frank perfect? I would be very hesitant to say that. So if there are aspects of Dodd Frank that could be improved I mean that is completely reasonable for Congress to take on board.”

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