Yields tumble to two-week lows on recession fears

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NEW YORK — U.S. Treasury yields fell to

two-week lows on Thursday on concerns that the Federal Reserve

will cause a recession by aggressively hiking interest rates,

and on a growing belief that yields may have topped for the near

term even if inflation stays high.

Yields have dropped from more-than-decade highs reached

before last week’s Fed meeting, when the U.S. central bank hiked

rates by 75 basis points, the biggest increase since 1994, and

signaled a similar move is possible in July.

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Fed Chairman Jerome Powell will testify before Congress for

a second day on Thursday, a day after saying the Fed is not

trying to engineer a recession to stop inflation but is fully

committed to bringing prices under control even if doing so

risks an economic downturn.

There are “growing recession fears,” said Benjamin Jeffery,

an interest rate strategist at BMO Capital Markets, noting that

Powell’s tone on Wednesday was “a bit more cautious.”

As concerns about a recession increase, Jeffery says 10-year

yields could drop back to the 2.50%-to-2.75% area, “especially

if we started to see even more concerning economic data and even

maybe some slowing in terms of hiring.”

Benchmark 10-year yields were at 3.111%, after reaching

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3.498% on June 14, the highest since April 2011.

Two-year Treasury yields fell to 2.994%. They have been down

from 3.456% on June 14, which was the highest since November

2007.

The closely watched yield curve between two-year and 10-year

notes was at 12 basis points, after inverting

early last week. An inversion in this part of the curve is seen

as a reliable indicator that a recession is likely in one to two

years.

Fed funds futures traders have pared back expectations on

how high the Fed is likely to raise its benchmark rate. They are

now pricing for the rate to peak at 3.51% in March, down from

expectations last week that it would increase to around 4%. It

is currently 1.58%.

Bonds were boosted earlier on Thursday after data showed

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that euro zone business growth has slowed significantly this

month – and by much more than expected – as consumers concerned

about soaring bills opted to stay at home and defer purchases to

save money.

U.S. data on Thursday showed that the number of Americans

filing new claims for unemployment benefits edged down last week

as labor market conditions remained tight, though some slowing

is emerging.

Inflation expectations also fell on Thursday. Breakeven

rates on five-year Treasury Inflation-Protected Securities

(TIPS), a measure of expected annual inflation for the next five

years, fell as low as 2.70%, the lowest since Feb. 8. They are

down from a five-week high of 3.25% reached on June 13.

The Treasury will sell $18 billion in five-year TIPS on

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Thursday.

June 23 Thursday 9:15AM New York / 1315 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.575 1.6032 0.010

Six-month bills 2.3275 2.3878 -0.018

Two-year note 99-20/256 2.9935 -0.063

Three-year note 99-90/256 3.1046 -0.091

Five-year note 97-160/256 3.1482 -0.079

Seven-year note 97-96/256 3.1745 -0.062

10-year note 98 3.1112 -0.045

20-year bond 96-184/256 3.4798 -0.012

30-year bond 93-72/256 3.2269 -0.015

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 36.75 -2.50

spread

U.S. 3-year dollar swap 15.75 -0.75

spread

U.S. 5-year dollar swap 3.75 0.00

spread

U.S. 10-year dollar swap 7.50 0.25

spread

U.S. 30-year dollar swap -25.25 0.25

spread

(Reporting by Karen Brettell; Additional reporting by Dhara

Ranasinghe in London; Editing by Jonathan Oatis)

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