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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, a day after major declines, as investors consolidated positions and weighed the monetary policy impact of banking system turmoil against stubbornly high inflation. Data showed U.S. inflation rose last month, boosting expectations the Federal Reserve would 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 after Silicon Valley Bank's collapse last week, as bank stocks plunged and the dollar fell. U.S. bank stocks recovered some ground on Tuesday as traders appeared to be speculating that the worst of the sell-off was over. 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 Fed is mindful that there is a new headwind, but at the same time, it is focused on separating out the impact of its financial stability and market stability operations as the overall thrust of monetary policy," said Lou Crandall, chief economist at money market research firm Wrightson in New York.
In afternoon trading, U.S. Treasury two-year yields rose 19.5 basis points (bps) to 4.225% , while the benchmark 10-year yield gained 12 bps at 3.637% .
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. The spread between the two-year and 10-year yields had narrowed to -37 bps earlier in the session, the tightest since late October. The curve was last at -58.70 bps. U.S. rate futures on Tuesday have priced in a 70% chance of a 25 bp hike at next week's Fed policy meeting, with a roughly 29% 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 4.88% in May, down from last week's estimate of 5.5% to 6%. 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 3:19PM New York / 1919 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.705 4.8284 -0.002
Six-month bills 4.69 4.884 0.080
Two-year note 100-202/256 4.2003 0.170
Three-year note 101-162/256 4.0416 0.152
Five-year note 101 3.7767 0.111
Seven-year note 101-174/256 3.7236 0.098
10-year note 99 3.6206 0.106
20-year bond 99-164/256 3.9009 0.074
30-year bond 97-160/256 3.7577 0.091
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 23.25 1.75
spread
U.S. 3-year dollar swap 13.75 2.00
spread
U.S. 5-year dollar swap 7.75 1.75
spread
U.S. 10-year dollar swap 3.75 3.00
spread
U.S. 30-year dollar swap -41.75 1.75
spread
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrew Heavens, Mark Potter and Richard Chang)
Messaging: rm://gertrude.chavez.reuters.com@reuters.net))