TREASURIES-Yields fall as aggressive Fed creates growth concerns

BY Reuters | ECONOMIC | 06/22/22 03:33 PM EDT
    (Adds comments from Fed officials, 20-year auction results,
quotes, updates prices)
    By Karen Brettell
    NEW YORK, June 22 (Reuters) - U.S. Treasury yields fell to
almost two-week lows on Wednesday as fears grew that the Federal
Reserve will cause a recession by aggressively tightening
monetary policy as it tackles soaring inflation.
    Fed Chairman Jerome Powell on Wednesday said that the U.S.
central bank is not trying to engineer a recession, but is fully
committed to bringing prices under control even if doing so
risks an economic downturn.
    The comments come after the U.S. central bank last week
hiked rates by 75 basis points, the biggest increase since 1994,
and signaled that a similar move is possible in July.

    Yields have dropped from more than decade highs reached
before last week's Fed meeting on concerns that rapid rate hikes
will dent the economy.
    "The Fed knows that inflation is a problem, they know they
need to get their hands around it and rate increases are the
only real tool that they have to do that," said Thomas Simons, a
money market economist at Jefferies in New York.
    That said, Simons said that Powell was slightly less
aggressive than he was after last week's meeting as he stated
that future moves will depend on economic data.
    "It's the dovish side of very hawkish," Simons said. "It's a
little bit less clear and a little bit less than totally
committed."
    Philadelphia Fed President Patrick Harker said on Wednesday
said if data in coming weeks show demand is slowing faster than
he expects, he would support a smaller half-point rate hike in
July; otherwise, he would support a bigger rate hike.

    Chicago Fed Bank President Charles Evans also signaled he'd
likely back another big interest rate hike in July unless
inflation data improves and nodded to the risk of a downturn
because the Fed cannot "fine-tune" the economy's response to
rising borrowing costs.
    Economists polled by Reuters expect the Fed to hike by
another 75 basis points in July, followed by a
half-percentage-point rise in September, and that it would not
scale back to quarter-percentage-point moves until November at
the earliest.
    Bonds also got a boost on Wednesday as oil prices tumbled on
news of a plan by U.S. President Joe Biden to cut fuel costs for
drivers and as recession fears dented demand.
    "The overnight session featured a pretty big drubbing in
energy, commodities prices and that's putting a little bit of a
deflationary bid into the curve," said Guy LeBas, chief fixed
income strategist at Janney Montgomery Scott in Philadelphia.
    Two-year Treasury yields fell to 3.056%. They have fallen
from 3.456% on June 14, which was the highest since November
2007.
    Benchmark 10-year yields were at 3.156%, after reaching
3.498% on June 14, the highest since April 2011.
    The closely watched yield curve between two-year and 10-year
notes was at 9 basis points, after inverting
early 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.
    Inflation expectations also fell. Breakeven rates on
five-year Treasury Inflation-Protected Securities (TIPS), a
measure of expected annual inflation for the next five years,
fell to 2.77, the lowest since Feb. 22.
    The Treasury Department saw average demand for a $14 billion
sale of 20-year bonds on Wednesday. The bonds sold at a high
yield of 3.488%, with a bid-to-cover ratio of 2.60 times.

    The Treasury will also sell $18 billion in five-year TIPS on
Thursday.

    June 22 Wednesday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.565        1.593     -0.095
 Six-month bills               2.345        2.4061    -0.055
 Two-year note                 98-246/256   3.056     -0.142
 Three-year note               99-24/256    3.1963    -0.159
 Five-year note                97-70/256    3.2266    -0.152
 Seven-year note               96-254/256   3.2374    -0.156
 10-year note                  97-160/256   3.1561    -0.149
 20-year bond                  96-136/256   3.4932    -0.148
 30-year bond                  93           3.2423    -0.148

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        39.25        -0.75
 spread
 U.S. 3-year dollar swap        16.25        -0.50
 spread
 U.S. 5-year dollar swap         3.75        -0.25
 spread
 U.S. 10-year dollar swap        7.25         0.75
 spread
 U.S. 30-year dollar swap      -25.50         2.00
 spread



 (Reporting by Karen Brettell; Editing by Chizu Nomiyama)

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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