TREASURIES-Yields on the rise after strong jobs, producer price data

By Matt Tracy Feb 16 (Reuters) - U.S. Treasury yields continued their rise on Thursday after the latest unemployment and producer price data raised expectations the Federal Reserve will hike rates higher for longer to combat inflation. The yield on 10-year Treasury notes was up 5.8 basis points at 3.864%, its highest since late December. The yield on the 30-year Treasury bond was up 6.2 bps at 3.914% The yield on two-year notes was up just 2.6 bps on Thursday, but at 4.652% remained higher than longer-dated notes. Meanwhile, the gap between yields on two-year and 10-year notes was last inverted at minus 78.4 bps, from Tuesday's peak inversion of minus 91.3 basis points. The inversion signals market expectations for a near-term recession. The likelihood of a 50-bp interest rate increase when Fed policymakers meet in March nearly tripled from before the data's release, but remained low at a 12.7% probability, according to fed funds futures. Chances of a 25-bp hike were seen at 87.3%. Labor market resilience, marked by a 53-year-low unemployment rate, is one of several factors that have raised the odds the Fed will continue raising interest rates through the summer. The number of Americans filing new claims for unemployment benefits unexpectedly fell last week in a further sign of the economy's continued strength. Initial unemployment claims slipped 1,000 to a seasonally adjusted 194,000 for the week ended Feb. 11, the Labor Department said on Thursday. Economists polled by Reuters had forecast 200,000 claims for the latest week. "The Federal Reserve's job has become increasingly difficult as the most recent data on inflation suggests that the moderation in late 2022 was much slower than initially reported," said Dante DeAntonio, director of economic research at Moody's Analytics.

Federal Reserve Bank of Cleveland President Loretta Mester said on Thursday inflation remains too high and that she was open to raising rates by more than her colleagues wanted at their last monetary policy meeting. "Data releases like this are why policymakers continue to reiterate their intention to raise rates higher before pausing, and then leaving rates in a restrictive territory for quite a while," Jefferies said in a note. A second report from the Labor Department on Thursday showed monthly producer prices accelerating in January. The producer price index for final demand rebounded 0.7% last month after decreasing 0.2% in December. On Tuesday, consumer price index data showed inflation accelerated in January. Headline prices increased 0.5% month-over-month while core prices rose 0.4%, in line with forecasts. However, both rose slightly more than expected on an annualized basis. <USCPI=ECI, USCPF=ECI> “The January producer price index issued the same message as the consumer price index that the U.S. disinflationary process will be a windy path, not a straight one," said Bernard Yaros, Jr., assistant director and economist at Moody's Analytics.

The Treasury Department auctioned $11 billion in 30-year Treasury inflation-protected securities on Thursday at a high yield of 1.550%, meeting demand expectations. It sold $15 billion of 20-year notes on Wednesday with a yield of 3.977%. Feb. 16 Thursday 3:05 p.m. New York / 2005 GMT Price Current Net Yield % Change (bps) Three-month bills 4.6775 4.7986 0.026 Six-month bills 4.82 5.0083 0.002 Two-year note 99-6/256 4.6528 0.026 Three-year note 99-12/256 4.3428 -0.005 Five-year note 97-106/25 4.0816 0.043 6
Seven-year note 97-6/256 3.9943 0.051 10-year note 97 3.8647 0.058 20-year bond 97-156/25 4.0507 0.068 6
30-year bond 94-236/25 3.9142 0.062 6

DOLLAR SWAP SPREADS

Last Net

(bps) Change

(bps)
U.S. 2-year dollar swap 31.75 -2.00
spread
U.S. 3-year dollar swap 19.25 -0.75
spread
U.S. 5-year dollar swap 6.25 -0.75
spread
U.S. 10-year dollar swap -1.00 0.25
spread
U.S. 30-year dollar swap -40.75 0.00
spread

(Reporting by Matt Tracy; Editing by Nick Macfie)