TREASURIES-Yields rise on strong jobless, producer price data

By Matt Tracy Feb 16 (Reuters) - U.S. Treasury yields rose on Thursday after the latest jobless claims and producer price data raised expectations the Federal Reserve will hike rates higher for longer to combat inflation. 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 yield on 10-year Treasury notes was up five basis points to 3.857%, its highest since Jan. 3. The yield on the 30-year Treasury bond was up 5.5 basis points to 3.906% The yield on two-year notes was up just 3.4 basis points on Thursday, but at 4.661% remained higher than longer-dated notes. 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. "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. The likelihood of a 50 basis point interest rate increase when Fed policymakers meet in March more than doubled from before the data's release, but remained low at a 9.9% probability, according to fed funds futures. Chances of a 25 basis point hike were seen at 90.1%.

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. "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.

"If anything, to date, the labor market has held up more strongly than the Fed would have hoped, and strong wage growth will continue to be a thorn in the side of core services inflation," he added. 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. “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.

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 gap between yields on two-year and 10-year notes was last inverted at minus 80.6 basis points, from Tuesday's peak inversion of minus 91.3 basis points. The inversion signals market expectations for a near-term recession. The Treasury Department sold $15 billion of 20-year notes on Wednesday with a yield of 3.977%, in line with bidding. An auction of $9 billion in 30-year Treasury inflation-protected securties is scheduled for Thursday. February 16 Thursday 9:44AM New York / 1444 GMT Price Current Net Yield % Change (bps) Three-month bills 4.6775 4.7986 0.026 Six-month bills 4.8275 5.0163 0.010 Two-year note 99-2/256 4.6613 0.034 Three-year note 98-246/256 4.3739 0.026 Five-year note 97-112/256 4.0762 0.037 Seven-year note 97-16/256 3.9877 0.045 10-year note 97-16/256 3.857 0.050 20-year bond 97-176/256 4.0448 0.062 30-year bond 95-12/256 3.9068 0.055
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 31.75 -2.00
spread
U.S. 3-year dollar swap 19.00 -1.00
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 -40.50 0.25
spread

(Reporting by Matt Tracy; editing by Barbara Lewis)