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U.S. producer prices fall, jobless claims rise
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U.s. yield curve narrows inversion
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U.S. rate futures still price in 25-bps hike in May
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U.S. 30-year bond auction shows solid results
By Gertrude Chavez-Dreyfuss NEW YORK, April 13 (Reuters) -
U.S. Treasury yields turned higher on Thursday after spending most of the session in negative territory, as investors consolidated positions that pushed yields lower over the last few days amid a surprise decline in producer prices in March and an uptick in jobless claims.
Thursday's data suggested that the Federal Reserve's aggressive tightening over the past year is taking its toll on the economy.
U.S. yields were already under pressure overnight in the wake of cooler-than-expected consumer prices last month, and Thursday's data kept the downward trend intact. "There's technical consolidation going on in the Treasury market. We're seeing a drift back toward that 3.50% handle on the 10-year," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
"That will continue to serve as a focal point for the
market in the coming months, not because we're anticipating a
more rapid sell-off, but rather we're transitioning to a point
where the Fed would be on hold for an extended period of time
after we get a 25 basis-point (bp) hike in May."
Data showed that the headline producer prices index (PPI) dropped 0.5% in March, the most in three years, while the core rate, excluding food and energy, dipped 0.1%. The consensus forecast for both numbers were no change in the headline figure and a rise of 0.3% for underlying prices. U.S. jobless claims, on the other hand, rose more than expected to 239,000 for the week ended April 8. Economists polled by Reuters had forecast 232,000 claims for the latest week.
In afternoon trading, U.S. two-year yields edged higher to 3.979% , while the benchmark 10-year yield rose 3.3 bps to 3.454% . The U.S. yield curve lessened its inversion after Thursday's data, suggesting traders have started to price out rate hikes this year. The spread between the U.S. two-year and 10-year yields narrowed to -52.7 bps , from -57 bps late on Wednesday. The inversion of this curve typically signals a looming recession, predicting eight of the last nine slowdowns.
Following the data, the U.S. rate futures market has priced in a nearly 70% chance of a 25-bp rate hike next month at the Fed policy meeting. TD Securities though expects rate cuts of about 275 bps starting in December 2022 to September 2023. That's a more aggressive easing than what the market expects, which sees about 153 bps of cuts.
"We don't expect a recession imminently, but expect growth to slow by year-end 2023 and look for a recession in Q4 2023. This is likely to prompt the Fed to cut more quickly than the market currently expects," said Gennadiy Goldberg, senior rates strategist, at TD Securities in New York.
"I think the market is pricing in a slower pace of cuts
in expectation of a soft landing, which we see as relatively
unlikely. We expect a harder landing from the economy once the
data begins to slow."
Also on Thursday, the Treasury auctioned
$18 billion in 30-year bonds , that came out on the stronger side after a weak 10-year note sale on Wednesday.
The auction's high yield was at 3.661%, which was the rate expected at the bid deadline. The bid-to-cover ratio, a measure of demand was 2.36 cover, slightly higher than last month's 2.35, and above the 2.25 ratio in February.
April 13 Thursday 3:17PM New York / 1917 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.885 5.0141 0.001
Six-month bills 4.75 4.9473 -0.009
Two-year note 99-208/256 3.9746 0.003
Three-year note 100-24/256 3.7165 0.009
Five-year note 100-138/256 3.5054 0.027
Seven-year note 100-232/256 3.4771 0.033
10-year note 100-100/256 3.4524 0.031
20-year bond 101-28/256 3.7946 0.028
30-year bond 98-216/256 3.689 0.034
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 30.75 -0.75
spread
U.S. 3-year dollar swap 18.50 -0.25
spread
U.S. 5-year dollar swap 7.50 -0.50
spread
U.S. 10-year dollar swap -1.50 -0.25
spread
U.S. 30-year dollar swap -43.50 0.00
spread
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alison Williams, Jonathan Oatis and Nick Zieminski)
Messaging: rm://gertrude.chavez.reuters.com@reuters.net))