TREASURIES-U.S. yields pause march higher as investors mull Fedspeak

By Davide Barbuscia NEW YORK, March 3 (Reuters) - U.S. Treasuries rallied on Friday as new highs in yields this week met resistance from dip buyers following comments from U.S. Federal Reserve officials that temporarily calmed fears around the direction of inflation and interest rates. U.S. government bond yields, which rise when prices fall, have been on the up this week as strong economic data in the U.S. and inflation numbers in Europe supported concerns that the fight against inflation is far from over and that central banks will need to raise rates more than expected to cool the economy. Benchmark 10-year Treasury yields as well as 30-year yields went above 4% for the first time since November, while two-year bond yields rose to levels not seen since 2007. On Friday, however, bond bears met some resistance after Fed officials on Thursday expressed doubts on whether recent hotter-then-expected data was a "blip" or a sign that higher interest rates were required to slow price rises. The market was trying to read through comments of Fed officials to gauge how the recent narrative of higher-for-longer rates will impact the U.S. central bank's economic projections, which will be released at its next meeting later this month, said Jake Jolly, senior investment strategist at BNY Mellon. Yields at 4% have "some psychological resonance as well ... at that level you're going to see a bit of a bid, so you're getting that push and pull from investors coming into the market being a little more attracted to extending duration," he said.

Friday's retrenchment in yields moderated after data showing that the U.S. services sector grew at a steady clip in February, with new orders and employment rising to more than one-year highs, suggesting the economy continued to expand in the first quarter. Yields of benchmark 10-year Treasuries were last seen at 4.002%, down about seven basis points from Thursday, while two-year yields , which more closely reflect monetary policy expectations, were last seen at 4.894%, down one basis point on the day.

The gap between the two- and 10-year yields , a harbinger of a looming recession when shorter duration rates are higher than longer-dated securities, remained deeply inverted at -89.6 basis points. Money market expectations that the Fed may go back to a 50 basis points increase of its policy rate at its next meeting this month gained some traction earlier this week, although the consensus remained largely around a 25 basis points hike. Investors will look at data for U.S. unemployment on March 10 and the Consumer Price Index on March 14 to get a sense of the Fed's next steps as it seeks to slow inflation to its 2% target. Fed Chair Jerome Powell’s testimony to Congress next week could also give some indications on the monetary policy outlook.

March 3 Friday 10:19AM New York / 1519 GMT Price Current Net Yield % Change (bps) Three-month bills 4.74 4.8615 -0.008 Six-month bills 4.9275 5.1347 -0.007 Two-year note 99-127/256 4.8942 -0.010 Three-year note 98-72/256 4.6297 -0.013 Five-year note 98-180/256 4.2917 -0.031 Seven-year note 98-216/256 4.1926 -0.048 10-year note 95-232/256 4.0027 -0.070 20-year bond 96-80/256 4.1484 -0.087 30-year bond 94-208/256 3.9208 -0.100
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 33.50 -0.25
spread
U.S. 3-year dollar swap 19.25 -0.50
spread
U.S. 5-year dollar swap 8.25 0.00
spread
U.S. 10-year dollar swap 1.00 0.00
spread
U.S. 30-year dollar swap -39.00 0.50
spread

(Reporting by Davide Barbuscia;Editing by Elaine Hardcastle)

Messaging: davide.barbuscia.reuters.com@reuters.net))