TREASURIES-Yields rise as investors weigh rate hikes and risk of downturn

BY Reuters | ECONOMIC | 06/24/22 03:52 PM EDT
    (Adds data, dealer positioning, quote, updates prices)
    By Karen Brettell
    NEW YORK, June 24 (Reuters) - U.S. Treasury yields rose from
two-week lows on Friday as investors weighed the likelihood that
the Federal Reserve will spark an economic downturn as it
aggressively hikes interest rates in a bid to stem soaring
inflation.
    Yields have dropped from more than decade highs reached
before last week's Fed meeting, when the U.S. central bank hiked
rates by 75 basis points, the biggest increase since 1994, and
signaled that a similar move is possible in July.
    "It's been a huge move lower really across the curve... It's
come down to some pricing out of central bank tightening," said
Zachary Griffiths, an interest rate strategist at Wells Fargo in
Charlotte, North Carolina.
    Fed funds futures traders have pared back expectations on
how high the Fed is likely to raise its benchmark rate as
concerns about an economic downturn increase. They are now
pricing for the rate to rise to 3.51% by March, down from
expectations last week that it would increase to around 4%. It
is currently 1.58%.
    Griffiths says inflation is unlikely to have peaked,
however, which will likely keep the Fed on an aggressive rate
hike path and keep shorter-dated yields elevated.
    The next major catalyst for the market will likely be the
release of the Personal Consumption Expenditures (PCE) price
index next Thursday, which will be watched for further
confirmation that price pressures remain heated.
    "The focus on economic data at this point is going to be
about as intense as it's been in recent memory," Griffiths said.
    Fed Chairman Jerome Powell said on Thursday that the Fed's
commitment to reining in 40-year-high inflation is
"unconditional" - but also comes with the risk of higher
unemployment.
    Yields briefly dipped on Friday after data showed that
consumer sentiment fell to a record low in June.
    Sales of new U.S. single-family homes also unexpectedly rose
in May, but the rebound is likely to be temporary as home prices
continue to increase and the average contract rate on a 30-year
fixed-rate mortgage approaches 6%, reducing affordability.

    Data released on Thursday, meanwhile, showed that primary
dealers reduced their holdings of Treasuries by $34.3 billion
to the smallest net long position since December 2021 last week
before the Fed's meeting, which could have played a role in the
yield increases.
    "It seems as though dealers lightened their loads
significantly ahead of the anticipated 75 bp rate hike,"
Jefferies economists Thomas Simons and Aneta Markowska said in a
report on Thursday.
    Benchmark 10-year yields were last at 3.125%. They have
fallen from 3.498% on June 14, the highest since April 2011.

    Two-year Treasury yields were at 3.053%, down from 3.456% on
June 14, which was the highest since November 2007.
    The closely watched yield curve between two-year and 10-year
notes was at 7 bps, 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.

      June 24 Friday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.6575       1.6873    0.053
 Six-month bills               2.4225       2.4859    0.059
 Two-year note                 98-249/256   3.0526    0.041
 Three-year note               99-64/256    3.1415    0.026
 Five-year note                97-130/256   3.1752    0.041
 Seven-year note               97-72/256    3.1904    0.046
 10-year note                  97-228/256   3.1245    0.055
 20-year bond                  96-56/256    3.5157    0.082
 30-year bond                  92-176/256   3.2597    0.079

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        33.00        -3.75
 spread
 U.S. 3-year dollar swap        15.50        -0.25
 spread
 U.S. 5-year dollar swap         4.00         0.75
 spread
 U.S. 10-year dollar swap        8.00         1.25
 spread
 U.S. 30-year dollar swap      -24.00         2.00
 spread





 (Reporting by Karen Brettell; editing by Jonathan Oatis and
Nick Macfie)

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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