TREASURIES-Yields reverse some post-Fed rally as European central banks hike rates

BY Reuters | ECONOMIC | 06/16/22 09:54 AM EDT
       By Davide Barbuscia
    NEW YORK, June 16 (Reuters) - U.S. Treasury yields rose on
Thursday, reversing some of the relief rally in prices on
Wednesday, when yields dropped after the Federal Reserve raised
interest rates by three-quarters of a percentage point.
    Yields - which move inversely to prices - had been rising
this week after worsening inflation data on Friday but the Fed's
expected decision on Wednesday to hike its benchmark interest
rate by 75 basis points - the biggest increase in nearly 30
years - led to a sharp rally as some investors and analysts had
feared an even higher increase.
    That was partly reversed on Thursday, when central banks in
Europe raised rates and in some cases caught markets off guard
with big hikes, as they seek to fight surging inflation.
    "Treasuries have seen a very lively bear-flattening after
Wednesday's relief rally," Citi strategists said, referring to a
dynamic where short-term interest rates increase at a faster
pace than long-term ones.
    "The surprise 50bp hike from the SNB has only accelerated
the retracement from yesterday's moves", they said.
    The Swiss National Bank raised its policy interest rate for
the first time in 15 years in a surprise move on Thursday, while
the Bank of England hiked borrowing costs by a quarter of a
percentage point.
    Benchmark U.S. Treasury 10-year yields rose to
3.429% from a close of 3.395% on Wednesday, while two-year
Treasury yields - more sensitive to interest rate
changes by the U.S. central bank - were up at 3.29% from 3.279%
on Wednesday.
    The closely watched yield curve between U.S. two-year and
10-year notes steepened to about 14 basis points
on Thursday, after inverting by 5 basis points earlier this
week. An inversion in this part of the curve is seen as a
reliable indicator that a recession is likely in one to two
    Fed Chair Jerome Powell indicated on Wednesday that while
another 75 basis points hike at the next central bank's meeting
in July was possible, he did not expect such supersized moves to
be common - a comment that gave some support to both the stock
and the bond markets.
    Barclays said in a note on Wednesday, after the Fed's
meeting, that it expected the bank to shift back to a 50 basis
points hike in July, due to signs of a slowdown in U.S.
consumer and housing demand. Fed funds futures on Thursday were
pricing in 67 basis points of tightening in July           .
    Breakeven rates on five-year Treasury Inflation-Protected
Securities (TIPS), a measure of expected annual inflation for
the next five years, eased to 2.911% on Thursday from 2.985% on
    "Markets reacted essentially in a dovish direction despite
the largest rate hike in a generation, which is more indicative
of just how far rates had gone in pricing in a hawkish surprise
over the past few days," Barclays strategists said in a note.

    June 16 Thursday 9:21AM New York / 1321 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.6375       1.6671    -0.090
 Six-month bills               2.2325       2.2892    -0.044
 Two-year note                 98-132/256   3.2903    0.011
 Three-year note               98-80/256    3.4732    0.037
 Five-year note                96-2/256     3.5098    0.038
 Seven-year note               95-72/256    3.5208    0.038
 10-year note                  95-96/256    3.4292    0.034
 20-year bond                  93-116/256   3.7182    0.041
 30-year bond                  89-80/256    3.4506    0.043

                               Last (bps)   Net
 U.S. 2-year dollar swap        40.25         4.00
 U.S. 3-year dollar swap        16.50         0.50
 U.S. 5-year dollar swap         2.75        -1.00
 U.S. 10-year dollar swap        5.00        -0.50
 U.S. 30-year dollar swap      -29.75         0.00

 (Reporting by Davide Barbuscia; editing by Jonathan Oatis)

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.