TREASURIES-U.S. yields slide as inflation fears stalk markets

BY Reuters | ECONOMIC | 05/12/22 11:04 AM EDT
       By Herbert Lash
    NEW YORK, May 12 (Reuters) - U.S. Treasury yields slid on
Thursday as the bond market assessed whether the Federal Reserve
can keep the economy from lurching into recession as it slams
the brakes on a rising pace of inflation despite showing signs
of moderation.
    The yield on 10-year Treasury notes fell 4.3
basis points to 2.870% as the benchmark U.S. government bond
pared losses after sinking to a morning low of 2.8173%.
    Attempts at taking a sanguine view on inflation were roiled
as equities slid in Europe and wavered on Wall Street as fears
of a global slowdown spooked markets and drove copper prices
below $9,000 a tonne for the first time since October.
    The Labor Department said the producer price index for final
demand rose 0.5% in April as the rising cost of energy products
moderated. The PPI surged 1.6% in March.
    The real yield, as seen by 10-year Treasury
Inflation-Protected Securities (TIPS), has
recently turned positive, suggesting an improving economic
outlook, said Dec Mullarkey, managing director of investment
strategy and asset allocation at SLC Management.
    "Yesterday those dropped down about 15 basis points and are
still going down," Mullarkey said. "What the market was pricing
in was maybe a little more profitability of a stagflation
scenario, maybe a little more probability to some type of
recession."
    The yield on 10-year Treasury notes was down
1.2 basis points to 0.189%. The yield has been positive since
the beginning of May for the first time since markets cratered
in March 2020 when the coronavirus pandemic swept the world.
    But the market is looking for evidence of how the Fed
achieves taming inflation, he said. "The Fed has actually done a
pretty good job reflecting what they expect to happen and that's
kind of priced into the forward curve right now," he said.
    In the 12 months through April, the PPI increased 11.0%
after accelerating 11.5% in March. Economists forecast the PPI
gaining 0.5% for the month and increasing 10.7% year-on-year.
    Slower gains in monthly producer price follows a similar
trend in consumer prices last month. The government reported on
Wednesday that consumer prices logged their smallest rise in
eight months in April. The annual increase in consumer prices
also slowed for the first time since last August.
    The Treasury will sell $22 billion of 30-year bonds at 1
p.m. (1700 GMT), the last of three auctions this week totaling
$103 billion.
    The yield on the 30-year bond fell 2.1 basis
points to 3.021%.
    A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year notes
, a gauge of recession risk, was at 28.2 basis
points. When the curve inverts, pushing yields on the short end
higher than the long end, a recession may occur in the future.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, fell 4.3 basis
points at 2.586%.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.997%.
    The 10-year TIPS breakeven rate was last at
2.697%, indicating the market sees inflation averaging about
2.7% 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 2.592%.

     May 12 Thursday 10:50AM New York / 1450 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.9025       0.9171    0.013
 Six-month bills               1.385        1.4141    -0.005
 Two-year note                 99-214/256   2.5859    -0.043
 Three-year note               99-236/256   2.7773    -0.036
 Five-year note                99-144/256   2.845     -0.032
 Seven-year note               99-216/256   2.8998    -0.035
 10-year note                  100-8/256    2.8714    -0.042
 20-year bond                  87-128/256   3.236     -0.026
 30-year bond                  84-240/256   3.0207    -0.021

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        27.50         0.25
 spread
 U.S. 3-year dollar swap        13.50        -0.25
 spread
 U.S. 5-year dollar swap         5.50         0.25
 spread
 U.S. 10-year dollar swap        7.25         1.50
 spread
 U.S. 30-year dollar swap      -26.00         1.00
 spread


 (Reporting by Herbert Lash
Editing by Nick Zieminski)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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