TREASURIES-Short-dated yields jump as Fed's Powell adopts hawkish tone on inflation

BY Reuters | ECONOMIC | 05/17/22 03:55 PM EDT
    (Recasts with comments from Fed's Powell, adds quotes, Fed
speakers, data, updates prices)
    By Karen Brettell
    NEW YORK, May 17 (Reuters) - Shorter-dated U.S. Treasury
yields jumped on Tuesday and the yield curve flattened after
Federal Reserve Chairman Jerome Powell said that the U.S.
central bank will "keep pushing" to tighten U.S. monetary policy
until it is clear that inflation is declining.
    "What we need to see is inflation coming down in a clear and
convincing way and we're going to keep pushing until we see
that," Powell said at a Wall Street Journal event.
    "If that involves moving past broadly understood levels of
'neutral' we won't hesitate to do that," Powell added, referring
to the rate at which economic activity is neither stimulated nor
    The comments confirmed the market's view that the Fed is
focused on easing price pressures even as stock market prices
wobble and some investors worry that aggressive tightening will
tip the U.S. economy into recession.
    "We've always known that 'neutral' is very difficult to
estimate, and so the idea that the Fed was going hike a while
and then pause and look around was out there, and it was on the
table, but he just told us that isn't going to occur," said Ian
Lyngen, head of U.S. rates strategy at BMO Capital Markets in
New York.
    "This is very consistent with what we've seen in the past,
which is once the Fed starts hiking, they continue to hike until
something breaks. Now the question becomes, is what we should be
looking at as a potential break the equity market? is it credit?
is it housing? I think that's going to be this cycle's big
unknown," Lyngen added.
    Fed funds futures traders expect the U.S. central bank to
hike rates by 50 basis points each at its June and July
meetings, with the Fed's benchmark rate likely to rise to 2.98%
by Feb., from 0.83% now.
    Two-year yields, which are highly sensitive to
interest rate moves, rose to 2.704%, up 14 basis points on the
    Benchmark 10-year notes were last at 2.973%, up
nine basis points on the day. The yields hit a 3-1/2-year high
of 3.203% on May 9 as investors adjusted for the prospect of
even more aggressive Fed policy.
    But they have dipped in the past week as investors also
worry that the rapid monetary tightening may strangle growth and
send the economy into a downturn.
    The yield curve between two-year and 10-year notes
 flattened four basis points to 27 basis points.
    Minneapolis Fed President Neel Kashkari said on Tuesday that
how high the Federal Reserve will ultimately need to raise U.S.
interest rates will depend in large part on how quickly supply
bottlenecks can get unstuck.
    St. Louis Fed president James Bullard also said that the
U.S. economy is likely to continue growing at an above-trend
pace for at least the next 18 months, and households are likely
to continue spending as the influence of the pandemic fades.

    Yields had gained earlier in the day after data showed that
retail sales increased strongly in April, reducing fears that
the economy is weakening.
    Retail sales rose 0.9% last month. Data for March was
revised higher to show sales advancing 1.4% instead of 0.5%, as
previously reported.
    The data "showed no sign that the consumer is cracking under
the weight of inflation, higher interest rates or the lack of
stimulus payments," Jefferies economists Aneta Markowska and
Thomas Simons said in a report.
    A separate report from the Fed on Tuesday showed production
at U.S. factories increased more than expected in April amid
continued strong demand for motor vehicles and other goods,
which should help to underpin manufacturing activity.

    U.S. business inventories also increased slightly more than
expected in March, lifted by a jump in motor vehicle stocks,
government data showed.
      May 17 Tuesday 3:21PM New York / 1921 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.055        1.0725    0.005
 Six-month bills               1.52         1.553     0.026
 Two-year note                 99-157/256   2.7044    0.136
 Three-year note               99-152/256   2.8927    0.146
 Five-year note                99-16/256    2.9547    0.135
 Seven-year note               99-56/256    3.0002    0.118
 10-year note                  99-40/256    2.9732    0.094
 20-year bond                  85-172/256   3.3748    0.069
 30-year bond                  94-104/256   3.1652    0.081

                               Last (bps)   Net
 U.S. 2-year dollar swap        27.25        -0.75
 U.S. 3-year dollar swap        12.00        -0.25
 U.S. 5-year dollar swap         3.00        -1.00
 U.S. 10-year dollar swap        6.00        -0.50
 U.S. 30-year dollar swap      -26.00        -0.50

 (Reporting by Karen Brettell; editing by Jonathan Oatis and
Nick Zieminski)

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