TREASURIES-Yields tumble on recession fears as Fed hikes rates

BY Reuters | ECONOMIC | 06/16/22 03:27 PM EDT
    (Recasts with yield drop, adds data, quote, updates prices)
    By Karen Brettell and Davide Barbuscia
    NEW YORK, June 16 (Reuters) - U.S. Treasury yields fell on
Thursday as fears of a recession dented risk appetite and
boosted demand for safe haven U.S. debt, a day after the Federal
Reserve hiked its benchmark interest rate by the most since
    Yields have quickly pushed higher since data on Friday
showed inflation soared in May, raising expectations that the
U.S. central bank will increase rates at a faster pace and by
more than previously expected to tame rising price pressures.
    The Fed on Wednesday raised rates by three-quarters of a
percentage point. Officials also envision steady rate hikes
through the rest of this year, perhaps including additional
75-basis-point hikes, with a federal funds rate at 3.4% at
year's end. That would be the highest level since January 2008.

    "The dot plot was certainly hawkish, with the median dots
exceeding the high bar set by the market," said Jonathan Cohn,
head of rates trading strategy at Credit Suisse.
    Now, investors fear that the Fed's monetary tightening could
tip the U.S. economy into recession.
    Fed projections showed that officials see the rate increases
slowing the economy markedly in coming months and causing a rise
in unemployment.
    Data on Thursday added to fears of slowing growth. The
number of Americans filing new claims for unemployment benefits
fell less than expected last week, suggesting some cooling in
the labor market, though conditions remain tight.
    A Commerce Department report showed U.S. housing starts
plunged 14.4% to a seasonally adjusted annual rate of 1.549
million units last month, the lowest since April 2021.
    Two-year Treasury yields, which are highly sensitive to
interest rate moves, fell to 3.158% and are down from 3.456% on
Tuesday, which was the highest since November 2007.
    Benchmark 10-year yields dipped to 3.307%, after reaching
3.498% on Tuesday, the highest since April 2011.
    The closely watched yield curve between two-year and 10-year
notes steepened to 14 basis points, after
inverting by 5 basis points on Tuesday. An inversion in this
part of the curve is seen as a reliable indicator that a
recession is likely in one to two years.
    Inflation expectations also fell on Thursday, indicating
that some market participants think the Fed could succeed in
bringing down consumer prices.
    Breakeven rates on five-year Treasury Inflation-Protected
Securities (TIPS), a measure of expected annual inflation for
the next five years, fell to 2.91%. They are down from a
five-week high of 3.25% reached on Monday.

    June 16 Thursday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.5525       1.5802    -0.177
 Six-month bills               2.17         2.2244    -0.109
 Two-year note                 98-195/256   3.1582    -0.121
 Three-year note               98-160/256   3.3615    -0.075
 Five-year note                96-154/256   3.3756    -0.096
 Seven-year note               96-24/256    3.385     -0.098
 10-year note                  96-96/256    3.3068    -0.088
 20-year bond                  94-216/256   3.6154    -0.062
 30-year bond                  90-224/256   3.361     -0.047

                               Last (bps)   Net
 U.S. 2-year dollar swap        44.00         7.75
 U.S. 3-year dollar swap        17.75         1.75
 U.S. 5-year dollar swap         3.25        -0.50
 U.S. 10-year dollar swap        4.75        -0.75
 U.S. 30-year dollar swap      -31.00        -1.25

 (Reporting by Davide Barbuscia; editing by Jonathan Oatis and
Richard Chang)

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.

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