Yields rise as Fed's Waller pushes back on Dovish Rate bets

(Bloomberg) — Treasury yields rose and the dollar strengthened against most of its major rivals after Federal Reserve Governor Christopher Waller dismissed bets that the U.S. central bank is nearing the end of its hike cycle.

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The yield on 10-year Treasuries rose seven basis points to 3.88%, reopening after a holiday after Waller said the Fed has some way to go before it stops hiking. The greenback gauge rose 0.2%. Waller also said the market had come out “ahead” because of the unexpected cooling of inflation.

The market reacted after getting “a reminder that the Fed is not going to change its mind on a good CPI result,” said Jason Wong, strategist at Bank of New Zealand in Wellington.

The dollar’s advance comes after the currency’s benchmark fell 3.5% last week, its biggest drop since the early days of the pandemic, as traders trimmed bets on aggressive Fed hikes after U.S. inflation slowed in October from the forecasts of economists. Treasury yields also fell and stocks rose on optimism that the Fed would not need to raise rates as much as expected.

The yield on two-year U.S. Treasuries rose six basis points to 4.40%, after falling 33 basis points last week. The yield on Australia’s 10-year bond rose eight basis points as traders in the Asia-Pacific region digested the potential that last week’s decline was overdone.

Fed spokesmen

Fed speakers this week are likely to shrug off last week’s market reaction as they look to tighten rather than loosen financial conditions, Commonwealth Bank of Australia strategists wrote in a note to clients. The dollar may partially pare last week’s declines as they were disproportionate to the size of the inflation gap, they said.

Fed Vice Chairman Lael Brainard will speak on Monday as part of a week full of appearances by the central bank. Producer price data is due on Tuesday.

Investors will also be awaiting the outcome of the meeting between US President Joe Biden and China’s Xi Jinping as world leaders gather at the G20 summit in Indonesia.

–With assistance from Ruth Carson and Garfield Reynolds.

(Updates government bond yields.)

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