By Matt Tracy
Feb 17 (Reuters) - U.S. Treasury yields eased a bit on Friday after the 10-year note hit
a three-month high, as the market placed greater odds that the Federal Reserve keeps interest
rates higher for longer in its fight against persistent inflation.
The climb in yields came as data this and last week showed the U.S. economy's continued
resilience in spite of higher borrowing costs implemented by the Fed since early last year.
The yield on 10-year Treasury notes was last at 3.826% after hitting its highest
level since early November at 3.929%. Meanwhile, the yield on two-year notes was last at 4.623%
after earlier reaching 4.677%, also the highest since early November.
“We had such a big move in rates this week, that today is just consolidation," said Priya
Misra, head of U.S. rates strategies at TD Securities in New York. "The market essentially is
responding to stronger growth data, stronger inflation data and a Fed that’s sounding more
hawkish."
The likelihood of a 50-bp interest rate increase when Fed policymakers meet in March
tempered down 12.7% after nearly reaching 16% earlier in the day. It has nearly tripled since
the Labor Department released its latest unemployment figures and producer prices. Financial
markets have also increasingly bet on another hike in June. "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 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 move 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 gap between yields on two-year and 10-year notes was last inverted at
minus 79.7 bps, from Tuesday's peak inversion of minus 91.3 bps. The inversion signals market
expectations for a coming recession.
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 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.
Two Federal Reserve officials on Friday added to a chorus of U.S. central bankers this week
in signaling that interest rates will need to go higher in order to successfully quash
inflation, although one guarded against inferring too much from recent unexpectedly-strong
economic data. Perhaps the most significant inflation data point 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 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 2:33 p.m. New York / 1933 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.6925 4.8116 0.011
Six-month bills 4.8375 5.0242 0.021
Two-year note 99-21/256 4.6234 0.004
Three-year note 99-30/256 4.3183 -0.019
Five-year note 97-158/256 4.0363 -0.012
Seven-year note 97-72/256 3.9513 -0.016
10-year note 97-80/256 3.8264 -0.017
20-year bond 98-8/256 4.0193 -0.021
30-year bond 95-124/256 3.8811 -0.023
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 19.50 0.50
U.S. 5-year dollar swap spread 5.75 -0.50
U.S. 10-year dollar swap spread -0.75 0.25
U.S. 30-year dollar swap spread -41.50 -1.00
(Reporting by Matt Tracy, Additional reporting by Herb Lash; Editing by Nick Zieminski)
