TREASURIES-Yields dip from one-month highs as data, Fed stays focus

By Karen Brettell NEW YORK, Feb 9 (Reuters) - U.S. Treasury yields fell from one-month highs on Thursday as investors evaluated the likely path of Federal Reserve policy after last week’s blockbuster jobs report, and before highly expected inflation data due next week. Yields jumped after data on Friday showed that employers added 517,000 jobs in January, leading investors to adjust for the likelihood that the U.S. central bank will hike rates further than previously expected. But it has also created new questions over whether the U.S. economy is headed for a soft landing or is at risk of a resurgence in inflation and potentially bigger problems further down the road. “On the one hand, you can look at it and go look how strong the labor market is and inflation is coming down still, so we’re really heading for a soft landing, so we should be pricing in better growth outcomes,” said Thomas Simons, a money market economist at Jefferies in New York. “But on the other hand ... the labor market data is actually going in the wrong direction for the Fed. This is actually, really not good because it suggests that this disinflationary trend that we’ve seen for the last couple of months is going to be temporary and short-lived and you’re not going to get all the way down to 2% sustainably, so this is going to require higher policy rates for longer,” he said. Seasonal factors for January could also make the jobs number unreliable, and difficult to read too much into, Simons added. Data on Thursday showed that the number of Americans filing new claims for unemployment benefits increased more than expected last week but remained at levels consistent with a tight labor market. Benchmark 10-year note yields were last at 3.586%, after reaching 3.692% on Wednesday, the highest since Jan. 6. Two-year yields were at 4.436%. They got as high as 4.493% on Monday, also the highest since Jan. 6.

The yield curve between two-year and 10-year notes inverted further to minus 85 basis points, reflecting concerns about an impending recession. Richmond Fed president Thomas Barkin said on Thursday that tight monetary policy is "unequivocally" slowing the U.S. economy, allowing the Fed to move "more deliberately" with any further interest rate increase.

That comes after Fed Chair Jerome Powell on Tuesday said that the jobs report showed why the battle against inflation will "take quite a bit of time," acknowledging that interest rates may need to move higher than expected if that kind of economic strength threatens the Fed's progress in lowering inflation. Fed funds futures traders raised bets that the Fed will raise rates over 5% after the jobs data. They are now expected to peak at 5.12% in July, and then fall to 4.82% by December. The next major U.S. economic release likely to sway Fed policy is consumer price inflation data for January, due on Tuesday. This is expected to show that headline prices rose 0.5% in the month, while core prices increased 0.4%. The Treasury will sell $21 billion in 30-year bonds on Thursday, the final sale of $96 billion in coupon-bearing supply this week. The government saw very strong demand for a $35 billion sale of 10-year notes on Wednesday, following a weak $40 billion auction of three-year notes on Tuesday.

February 9 Thursday 9:39AM New York / 1439 GMT Price Current Net Yield % Change (bps) Three-month bills 4.5875 4.7052 -0.009 Six-month bills 4.7325 4.9152 -0.009 Two-year note 99-107/256 4.4358 -0.018 Three-year note 99-194/256 4.0866 -0.014 Five-year note 98-186/256 3.7832 -0.037 Seven-year note 98-192/256 3.7049 -0.044 10-year note 99-72/256 3.5862 -0.050 20-year bond 102-196/256 3.7994 -0.067 30-year bond 106-104/256 3.6452 -0.067
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 28.25 0.75
spread
U.S. 3-year dollar swap 17.75 -0.25
spread
U.S. 5-year dollar swap 6.00 0.50
spread
U.S. 10-year dollar swap -0.75 2.25
spread
U.S. 30-year dollar swap -37.00 0.50
spread

(Reporting by Karen Brettell; editing by Jonathan Oatis)