increasing market expectations the U.S. economy is headed into a recession. "The markets are presuming that the Fed is going to cut interest rates later this year but I don't think that's the likely scenario," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC. "The recession will be long but shallow, and I think that will keep inflation from really turning down quickly," he said. Yields had risen earlier after a surprise cut in OPEC+ crude production announced on Sunday renewed market concerns about high inflation. Crude traded more than 6% higher on the decision, which could push oil prices toward $100 a barrel and make it harder for inflation to slow and potentially less likely the Fed cuts rates. Fed funds futures showed an increased likelihood the Fed raises rates on May 3 when policymakers conclude a two-day meeting. The outlook for higher oil prices initially took some of the gloss from a bond rally on Friday, but not everyone saw the announcement causing a big impact on inflation as adherence to production cuts often has been lacking. "It's unlikely there's a "big, long-lasting impact" from the OPEC+ announcement, considering how the market reacted after a 2 million barrel per day cut in November, said David Petrosinelli, senior fixed income trader at InspereX in New York. "The Fed's probably going to do another rate hike or two, the market is by and large expecting it," he said about the bond market. "I don't know if this disrupts what the Fed is doing right now." The yield on 10-year notes fell 6.4 basis points to 3.426%. Yields slid on Friday after the Fed's preferred gauge of inflation, the core PCE price index, came in softer than expected for February at 0.3%. "Whatever measure you look at, you're still in the 4.5% range of inflation without a lot of budging," Petrosinelli said. The probability that the Fed raises its target rate by 25 basis points at the end of its two-day policy meeting on May 3 rose to 56.3% from 48.4% on Friday, CME's FedWatch Tool shows. Fed funds also raised the market outlook for the target rate to 4.967% in May, while prices for December suggest the Fed cuts the rate to 4.343%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.527%. The 10-year TIPS breakeven rate was last at 2.334%, indicating the market sees inflation averaging about 2.4% a year for the next decade. The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.500%. April 3 Monday 10:45 a.m. New York / 1445 GMT Price Current Net Yield % Change (bps) Three-month bills 4.6625 4.7805 -0.022 Six-month bills 4.7375 4.9313 0.044 Two-year note 99-200/256 3.9902 -0.072 Three-year note 102-108/256 3.7482 -0.082 Five-year note 100-118/256 3.5234 -0.088 Seven-year note 100-220/256 3.4853 -0.076 10-year note 100-156/256 3.4263 -0.064 20-year bond 101-96/256 3.7757 -0.047 30-year bond 99-168/256 3.6438 -0.044
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap spread 33.75 1.75
U.S. 3-year dollar swap spread 18.00 0.25
U.S. 5-year dollar swap spread 5.75 0.00
U.S. 10-year dollar swap spread -1.00 -0.50
U.S. 30-year dollar swap spread -43.25 1.25
(Reporting by Tom Westbrook; Editing by Kirsten Donovan)
