Both readings fell in line with expectations of economists polled by Reuters. The Fed will need to keep gradually raising interest rates to beat inflation, two U.S. central bank officials said on Tuesday, as they put investors on notice that borrowing costs may ultimately need to go higher than is now widely expected. "Inflation is normalizing but it's coming down slowly," Richmond Fed President Thomas Barkin said on Tuesday. "I just think there's gonna be a lot more inertia, a lot more persistence to inflation than maybe we'd all want." Traders of interest rate futures now see the Fed raising borrowing costs three more times, bringing the policy rate to the 5.25%-5.50% range by July and above the 5.1% by December that policymakers previously projected. "The idea that there would be significant disinflation and a subsequent need to pull back on tightening rate policy has unwound," said Tim Schwarz, portfolio manager at Ninety One.
"In the end, it was pretty much a sideways print, but certainly one that
corroborates the path of higher rates deeper into the year," he said.
Benchmark 10-year note yields rose to 3.760%, their highest
since Jan. 3, reflecting market expectations that the Fed keeps interest rates
higher for longer.
Two-year yields rose to 4.624%, their highest since early
November. The two-year is particularly sensitive to rate movement expectations.
“My quick take on this is that the number in my view is higher than what the
market expected," said Tom di Galoma, managing director and co-head of rates
trading at BTIG.
"Disinflation is kind of changed here," he said. "This gives some ammunition
to the Fed to basically come out with more hawkish rhetoric."
The yield curve between two-year and 10-year notes inverted
further to minus 86.3 basis points on Tuesday, after inverting as far as minus
88 basis points last week.
Prior to the CPI report, the Fed's Senior Loan Officer Survey on Monday
indicated tightening credit conditions, as the latest quarter's results showed
banks continuing to tighten their lending standards despite tighter spreads.
The next major data point will come Wednesday after the release of January
retail sales volume. This is expected to show retail sales rebounding 1.6% in
January after falling 1.1% in December, according to a Reuters survey of
economists. Later this month, on Feb. 24, the Commerce Department will release personal
consumption expenditure and income data.
The Treasury Department will sell $36 billion in 17-week bills on Wednesday,
following weaker than expected demand for last week's auctions. On Thursday, it
will also sell $75 billion in four-week bills and $60 billion in eight-week
bills.
February 14, Tuesday 2:37PM New York / 1937 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.665 4.7869 0.009
Six-month bills 4.8325 5.0223 -0.003
Two-year note 99-19/256 4.6239 0.090
Three-year note 99-28/256 4.3197 0.099
Five-year note 97-190/256 4.0063 0.080
Seven-year note 97-146/256 3.9019 0.064
10-year note 97-216/256 3.7607 0.042
20-year bond 100-208/256 3.94 0.018
30-year bond 96-224/256 3.8005 0.008
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap spread 33.00 4.25
U.S. 3-year dollar swap spread 20.25 3.25
U.S. 5-year dollar swap spread 6.50 1.25
U.S. 10-year dollar swap spread -1.00 0.75
U.S. 30-year dollar swap spread -39.25 -0.75
(Reporting by Matt Tracy; Editing by Chizu Nomiyama)
