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 hiking rates through the summer. The likelihood of a 50-bp interest rate increase when Fed policymakers meet in March has nearly quadrupled since the Labor Department released its latest unemployment figures and producer prices. Financial markets are also increasingly betting on another hike in June. The bond market is beginning to accept that rates may go higher than they thought and the path of a rate reduction is slower, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York. “The fed funds rate could higher than the 5.25-5.5% that will eventually be where they take a pause,” he said. But “the terminal rate is less of an issue. What’s more of an issue is the market still expects a pivot,” he said. The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, while monthly producer prices accelerated in January, the Labor Department said on Thursday. HIGHER RATES
Two Fed officials said on Thursday the U.S. central bank likely should
have raised rates higher than it did early this month, warning that
additional hikes are essential to lower inflation to desired levels.
The Fed "has come an appreciable in bringing policy from a very
accommodative stance to a restrictive one, but I believe we have more work to
do," Cleveland Fed President Loretta Mester said in a virtual speech to a
Global Interdependence Center conference.
Perhaps the most significant inflation datapoint this week came on
Tuesday, when consumer price index data showed inflation accelerated in
January. Both headline and core prices rose slightly more than expected on an
annualized basis. The gap between yields on two-year and 10-year notes was
last inverted at minus bps, from Tuesday's peak inversion of minus 91.3 bps.
The inversion signals market expectations for a coming recession.
"I do think there's still more capacity for the Fed to come off as more
hawkish, and that should be most detrimental for the front end of the curve,"
said Ben Jeffrey, U.S. rates strategist at BMO Capital Markets in New York.
"At that point we would expect the curve will start to move steeper."
The Treasury Department on Thursday auctioned $11 billion in 30-year
Treasury inflation-protected securities at a high yield of 1.550%, meeting
expectations for demand. This followed a $15 billion auction of 20-year notes
on Wednesday at a yield of 3.977%.
Feb. 17 Friday 9:46 a.m. New York / 1446 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.6925 4.8116 0.011
Six-month bills 4.855 5.0428 0.040
Two-year note 98-253/256 4.6747 0.056
Three-year note 98-240/256 4.3836 0.047
Five-year note 97-94/256 4.0934 0.045
Seven-year note 96-240/256 4.0095 0.043
10-year note 96-212/256 3.8863 0.043
20-year bond 97-52/256 4.0811 0.041
30-year bond 94-116/256 3.942 0.038
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap spread 31.25 -0.25
U.S. 3-year dollar swap spread 19.25 0.25
U.S. 5-year dollar swap spread 6.25 0.00
U.S. 10-year dollar swap spread -0.25 0.75
U.S. 30-year dollar swap spread -40.25 0.25
(Reporting by Matt Tracy, Additional reporting by Herb Lash; Editing by
David Holmes)
