TREASURIES-Yields rise as stocks rally but recession fears linger

BY Reuters | TREASURY | 06/21/22 03:50 PM EDT
    (Updates throughout, adds details, updates prices)
    By Davide Barbuscia
    NEW YORK, June 21 (Reuters) - U.S. Treasury yields rose on
Tuesday as the risk-off mode which weighed on U.S. markets last
week took a pause, lifting stocks as investors returned from a
long holiday weekend.
    U.S. government bond yields had declined on Friday after a
volatile week in which they hit more than 10-year highs on
expectations of aggressive interest rate hikes, and then fell on
concerns about how these will affect growth.
    Major Wall Street indexes fell for the third week in a row
last week amid heightened volatility after the U.S. Federal
Reserve's largest rate increase since 1994, but they climbed in
a bear market rally on Tuesday.
    "It feels like investors are selling Treasuries to pivot
back into equities following a brutal sell-off over the past few
weeks," said Steven Schweitzer, senior fixed-income portfolio
manager with the Swarthmore Group.
    Tuesday's gains in the S&P 500, however, were likely
to be short-lived, Capital Economics said, as the Fed's
tightening cycle still had a long way to go and because of
expectations the U.S. economy would weaken.
    Data on Tuesday showed that U.S. existing home sales tumbled
to a two-year low in May, a sign that the housing market is
losing speed amid high prices and rising mortgage rates.

    Expectations of more big moves by the U.S. central bank as
it seeks to counter inflation were also pushing yields up, with
Fed funds futures traders on Tuesday pricing in an 85% chance of
another 75 basis points hike in July.
    "My hunch is that traders are now inking in, as opposed to
just penciling in, another 75 basis points rate (increase) in
July," said Schweitzer.
    Richmond Federal Reserve President Thomas Barkin said on
Tuesday that an interest rate increase of 50 or 75 basis points
at the U.S. central bank's next policy meeting in July seemed
reasonable.
    Two-year Treasury yields, which are highly
sensitive to interest rate moves, rose to 3.194% on Tuesday,
from 3.166% on Friday.
    Benchmark 10-year yields climbed to 3.303% from
their 3.239% close at the end of last week.
    The long end of the U.S. yield curve, however, could change
course as investors continue to be cautious due to increasing
concerns there will be a sharp economic slowdown.
    Goldman Sachs now sees a 30% chance that the U.S. economy
will tip into a recession over the next year, up from its
previous forecast of 15%.
    U.S. investment firm PIMCO said on Tuesday the outlook for
bonds could improve due to rising recessionary concerns and
after a sell-off that has hammered valuations.
    A Fed determined to hike rates aggressively to fight
inflation implies flatter yield curves, more recessionary fears
and lower yields for longer-term Treasury debt, strategists at
NatWest Markets said. "However, the volatility in markets is too
much to have a strong directional view in the very near term,"
they said in a note.
    The closely watched yield curve between two-year and 10-year
notes climbed to 10.8 basis points on Tuesday,
after inverting by 5 basis points last week.
    An inversion in this part of the curve is seen as a reliable
indicator that a recession is likely in one to two years.

      June 21 Tuesday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.5525       1.5799    -0.013
 Six-month bills               2.3275       2.387     0.158
 Two-year note                 98-178/256   3.1984    0.032
 Three-year note               98-164/256   3.3579    0.017
 Five-year note                96-152/256   3.3792    0.039
 Seven-year note               96-14/256    3.3926    0.056
 10-year note                  96-96/256    3.3073    0.068
 20-year bond                  94-128/256   3.6408    0.096
 30-year bond                  90-92/256    3.3904    0.096

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        40.00        -2.25
 spread
 U.S. 3-year dollar swap        16.75        -1.00
 spread
 U.S. 5-year dollar swap         3.75        -0.25
 spread
 U.S. 10-year dollar swap        6.50         0.25
 spread
 U.S. 30-year dollar swap      -27.50         0.75
 spread


 (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.

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