TREASURIES-U.S. yields drop as growth worries mount amid hawkish Fed

BY Reuters | TREASURY | 05/18/22 03:12 PM EDT
       * U.S. yield curve flattens
    * U.S. housing data comes in weaker than expected in April
    * U.S. solid 20-year bond auction adds to Treasuries demand

 (Adds comment, U.S. 20-year bond auction, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 18 (Reuters) - U.S. Treasury yields fell in
choppy trading on Wednesday, tracking losses on Wall Street,
after poor U.S. housing data added to growing slowdown concerns
amid aggressive monetary tightening by the Federal Reserve.
    That said, a steep path for U.S. interest rates remained the
prevailing market consensus.
    "We are seeing U.S. growth decelerate. The question is how
much it will decelerate and will it actually start to
persistently slow," said Bill Merz, head of fixed income at U.S.
Bank Wealth Management in Minneapolis.
    "That's a big if, and right now we're just seeing signs of
softening data and of tighter financial conditions."
    The Fed is trying to dampen demand so inflation comes down,
and part of that works through expectations rather than the
actual act of hiking rates, Merz said.
    "Expectations are for such extreme rate hikes that current
activity begins to slow. But we don't really know if we're at
that point yet. We haven't seen enough evidence that
expectations are starting to influence rate hikes at this
point," he added.
    A solid U.S. 20-year bond auction also added to bids on
    U.S. benchmark 10-year yields hit one-week highs of 3.015%
amid ultra-hawkish comments from Fed Chair Jerome Powell on
Tuesday. But the yield fell below 3% after a soft U.S. housing
starts number.
    Powell said on Tuesday the Fed would push interest rates as
high as needed to stem a surge in inflation that he said
threatened the foundation of the economy.
    "If that involves moving past broadly understood levels of
'neutral' we won't hesitate to do that," Powell said at a Wall
Street Journal event, referring to the rate at which economic
activity is neither stimulated nor constrained.
    Interest rate futures have priced in a fed funds rate of
2.82% at the end of this year, compared with the current level
of 0.83%. Futures have also factored in roughly 197 basis points
of cumulative hikes in 2022.
    The fall in U.S. housing starts and building permits amid
rising mortgage rates pressured Treasury yields as stocks fell.
    U.S. housing starts slipped 0.2% to an annual rate of 1.724
million units last month, with the March data revised lower to a
rate of 1.728 million units.
    April's permits for future homebuilding also dropped 3.2%.
    In afternoon trading, 10-year yields slid 7 basis points to
2.896%, while the 30-year bond yield
fell 8 basis points to 3.08%.
    On the front end of the curve, U.S. two-year yields, which
are sensitive to Fed rate expectations, were down 2.6 basis
points at 2.671%.
    The yield curve has further flattened, with the spread
between U.S. two- and 10-year yields narrowing to 22 bps
    Wednesday's U.S. 20-year auction was well received, stopping
through a high yield of 3.290%, lower than the expected rate at
the bid deadline. Still this was the highest yield on record
since the maturity was reintroduced in May 2020.
    Its bid-to-cover ratio, a measure of demand, of 2.5 was
lower, however, than last month's auction.

      May 18 Wednesday 3:01PM New York/1901 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.0225       1.0394    -0.031
 Six-month bills               1.5          1.5325    -0.015
 Two-year note                 99-174/256   2.6694    -0.029
 Three-year note               99-190/256   2.8405    -0.041
 Five-year note                99-84/256    2.8965    -0.049
 Seven-year note               99-184/256   2.9199    -0.075
 10-year note                  99-224/256   2.8895    -0.081
 20-year bond                  86-244/256   3.2776    -0.093
 30-year bond                  96-40/256    3.0721    -0.092

                               Last (bps)   Net
 U.S. 2-year dollar swap        27.75         0.25
 U.S. 3-year dollar swap        13.50         1.25
 U.S. 5-year dollar swap         3.00         0.00
 U.S. 10-year dollar swap        5.75        -0.25
 U.S. 30-year dollar swap      -27.00        -1.00

 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan

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