By Karen Brettell
NEW YORK, March 22 (Reuters) - U.S Treasury yields edged
higher on Wednesday before the Federal Reserve is expected to
hike interest rates by an additional 25 basis points as
investors weighed whether Fed Chair Jerome Powell is also likely
to adopt a more dovish or hawkish tone on future policy in light
of recent stress in the banking system.
The U.S. central bank is caught between needing to reign in
still-high inflation and the risk that the economy faces a
material slowdown as banks offer fewer loans due to increased
risk aversion and recent bank failures including Silicon Valley
Bank.
Fed funds futures are pricing in an 85% probability of a 25
basis points rate increase though several banks see the Fed as
more likely to keep rates unchanged at 4.50% to 4.75%. “The market now has a hike priced in; that’s obviously the
path of least resistance,” said Michael Lorizio, senior fixed
income trader at Manulife Investment Management in Boston.
But the Fed is also likely to communicate “all the things we
already know to be true - that they will continue to watch
financial conditions and be available to facilitate any
necessary steps to ensure the health of the banking system, the
U.S. economy and everything they can contribute to,” he added.
Yields have risen from six-month lows reached on Monday on
improving risk sentiment as investors take comfort in the rescue
of Credit Suisse and steps taken by the Fed and regulators to
stabilize the U.S. regional banking sector.
Benchmark 10-year Treasury yields rose 3 basis
points to 3.634% on Wednesday. They have risen from a six-month
low of 3.291% reached on Monday but remain well below their
15-year peak of 4.338% reached on Oct. 21.
Interest rate-sensitive two-year yields rose 6
basis points to 4.235% and are also up from a six-month low of
3.635% on Monday, but are sharply below the almost 16-year high
of 5.084% hit on March 8.
The closely watched yield curve between two-year and 10-year
notes remained deeply inverted at minus 61 basis
points, a level that still indicates a looming recession, though
it remains off its extreme levels of minus 111 basis points
reached on March 8.
The curve could invert further, however, if the Fed
surprises markets with a more hawkish tone, according to Jim
Vogel, an interest rate strategist at FHN Financial in Memphis,
Tennessee.
“If the FOMC comes across as more hawkish than expected,
look for further curve inversion as the highest probability
outcome,” Vogel said in a note on Wednesday. “We can list a
dozen good reasons for policy officials to be hawkish, but
investor fears will tilt toward concern about the current health
of the financial system if hawkishness is (the) choice this
afternoon.”
The yield curve is inverted as longer-dated yields price in
an expected economic slowdown while shorter-dated yields largely
track Fed policy.
March 22 Wednesday 9:20AM New York / 1320 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.6275 4.7473 -0.006
Six-month bills 4.79 4.9907 0.067
Two-year note 100-183/256 4.2354 0.058
Three-year note 101-174/256 4.0206 0.036
Five-year note 100-244/256 3.7861 0.040
Seven-year note 101-164/256 3.7291 0.033
10-year note 98-228/256 3.6341 0.028
20-year bond 99-24/256 3.9409 0.030
30-year bond 97-148/256 3.7604 0.024
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 29.00 0.25
spread
U.S. 3-year dollar swap 18.50 1.75
spread
U.S. 5-year dollar swap 9.25 0.00
spread
U.S. 10-year dollar swap 2.25 -0.25
spread
U.S. 30-year dollar swap -45.50 0.00
spread
(Reporting by Karen Brettell; editing by Jonathan Oatis)
