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U.S. core inflation rises in February
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Markets price in 25-bp hike next week
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U.S. 2-year/10-year yield curve deepens inversion for now
By Gertrude Chavez-Dreyfuss
NEW YORK, March 14 (Reuters) - U.S. Treasury yields rose
on Tuesday, after posting big drops the previous session, as
investors consolidated positions and weighed the monetary policy
impact of banking system turmoil against stubbornly high
inflation.
Data showed that U.S. inflation numbers rose last month,
suggesting some expectation the Federal Reserve could continue
to raise interest rates next week, though at a gradual pace,
despite concerns about liquidity in the banking sector.
U.S. yields tumbled on Monday with the collapse of Silicon
Valley Bank, as bank stocks plunged and the dollar fell. On
Tuesday, fear of contagion continued to grip markets with global
bank stocks taking another beating, before recovering ground.
The markets, however, kept one eye on inflation which has
plagued the economy all year.
Data showed the U.S. consumer price index (CPI) rose 0.4%
last month after accelerating 0.5% in January. That lowered the
year-on-year increase in the CPI to 6.0% in February, the
smallest annual gain since September 2021.
But excluding volatile food and energy components, the CPI increased 0.5% after rising 0.4% in January. In the 12 months through February, the so-called core CPI gained 5.5% after advancing 5.6% in January. "The pace of this inflation matters but now the Fed has to also consider the rising risks in financial stability. So policy makers will be attentive to those risks and likely pause sooner than they otherwise would have," said Angelo Kourkafas, investment strategist, at Edward Jones in St. Louis. "It will be a balancing act for the Fed because we cannot look at this in isolation. At this point financial stability is probably as big a threat as inflation." In mid-morning trading, U.S. Treasury two-year yields rose 28.9 basis points (bps) to 4.323% , while the benchmark 10-year yield gained 13 bps to 3.645% . The U.S. Treasury yield curve extended its inversion in the wake of the CPI data as investors started to price in a rate hike next week. That said, the spread between the two-year and 10-year yields narrowed to -37 bps earlier in the session, the tightest spread since late October. U.S. rate futures are now pricing in an 80% chance of a 25 bp hike at next week's Fed policy meeting, with a roughly 19% probability of a pause. The market last week was poised for a 50-bps increase prior to the SVB collapse. Futures traders now expect a peak Fed funds rate of 4.97% in May. That was between 5.5% to 6% last week. Markets have also priced in cuts by June. "Inflation has peaked but remains stubbornly firm and isn't declining as quickly as the Fed would like," wrote Tom Simons, money market economist, at Jefferies in a research note. "The recent string of regional bank failures likely closed the door on a 50 bp rate hike, but today's data suggests that the Fed is going to remain on-track for a 25-bp hike on March 22."
March 14 Tuesday 10:28AM New York / 1428 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.7825 4.9089 0.079
Six-month bills 4.79 4.9907 0.187
Two-year note 100-125/256 4.3613 0.331
Three-year note 101-74/256 4.1635 0.273
Five-year note 100-130/256 3.8861 0.220
Seven-year note 101-32/256 3.8142 0.188
10-year note 98-128/256 3.6816 0.167
20-year bond 99-28/256 3.9398 0.113
30-year bond 97 3.7934 0.126
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 26.50 5.00
spread
U.S. 3-year dollar swap 17.25 5.50
spread
U.S. 5-year dollar swap 7.25 1.25
spread
U.S. 10-year dollar swap 2.25 1.50
spread
U.S. 30-year dollar swap -43.00 0.50
spread
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Sinead Carew; Editing by Andrew Heavens and Mark Potter)
Messaging: rm://gertrude.chavez.reuters.com@reuters.net))