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Rate hike of 25 bps backed by almost all Fed officials
-minutes
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Fed funds futures price in three more hikes
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U.S. five-year note auction shows solid results
By Gertrude Chavez-Dreyfuss NEW YORK, Feb 22 (Reuters) -
U.S. Treasury yields slid on Wednesday, with the 10-year yield backing off three-month peaks, even as investors expected strong economic data to keep lifting interest rates.
Minutes from the Federal Reserve's last policy meeting, released on Wednesday, reinforced the belief that the U.S. central bank will keep rates higher for longer.
A
solid majority of Fed officials agreed to reduce hikes of the benchmark overnight rate to 25 basis points (bps). But "a few" participants at the meeting outright favored a larger 50- bps increase, or said they "could have supported" it.
"The Fed minutes were dovish mainly on the commentary around the risk of a financial shock. There were also some dovish comments with regard to wages," said Thierry Wizman, global FX and rates strategist, at Macquarie in New York.
"But in the final analysis, the Fed still concluded that more rate hikes are coming. Even if there were dovish comments in the minutes, the market felt that if the FOMC (Federal Open Market Committee) had met today instead of three weeks ago, it would have been a different commentary given the employment trends and the strong retail sales." U.S. 10-year yields hit new three-month highs earlier on Wednesday, before trading 2 bps lower at 3.933%. U.S. two-year yields , which reflect rate expectations, were slightly down on the day at 4.697%, after hitting three-month peaks on Tuesday. St. Louis Fed President James Bullard, who is not a voter on the FOMC this year, on Wednesday reiterated his view that a Fed policy rate of 5.25% to 5.5% would be adequate to curb inflation. His assessment is in line with the rate futures market, which expects a peak fed funds rate of 5.38% hitting in July . "With employment growth solid or robust and with inflation dishearteningly high and not coming down as fast as people expect, I think people are starting to scale back on recession expectations," said Stan Shipley, fixed income strategist at Evercore ISI in New York. "So the 10-year yield should be trading with a four-handle." Following the Fed minutes release, investors in
futures tied to the Fed's policy rate mainly kept their bets that the central bank will keep raising rates a quarter of a point at its next three meetings.
The yield on the 30-year Treasury bond was
down 4. 5 bps
at
3.93 %. Earlier in the session, the yield rose to 3.987%, the highest since late December.
A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year notes was still inverted at -77.60 bps, little changed from Tuesday. The gap narrowed to -73.10 bps earlier, the steepest since Feb. 3. This curve has been inverted since July and typically predicts a recession. Wednesday's U.S. Treasury's auction of $43-billion
five-year notes was decent, with a high yield of 4.109%, marginally above the expected rate of 4.106% at the bid deadline.
There were $106.7 billion in bids for the note for a 2.48 bid-to-cover ratio, lower than the previous 2.64 during the January auction, but slightly above the 2.43 average.
February 22 Wednesday 3:38PM New York / 2038 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.71 4.833 0.017
Six-month bills 4.91 5.1049 -0.005
Two-year note 99-218/256 4.7036 0.000
Three-year note 98-200/256 4.4411 -0.003
Five-year note 97-14/256 4.1658 -0.007
Seven-year note 96-132/256 4.0815 -0.010
10-year note 96-116/256 3.9331 -0.020
20-year bond 97 4.0964 -0.036
30-year bond 94-144/256 3.9355 -0.041
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 34.25 3.75
spread
U.S. 3-year dollar swap 19.50 0.75
spread
U.S. 5-year dollar swap 6.50 0.75
spread
U.S. 10-year dollar swap 0.25 0.50
spread
U.S. 30-year dollar swap -39.75 1.00
spread
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci
and Richard Chang)
