TREASURIES-U.S. yields slip as inflation fears hound investors

BY Reuters | TREASURY | 06/29/22 03:15 PM EDT
    (Adds fresh prices, Reinhardt comment)
    By Herbert Lash
    NEW YORK, June 29 (Reuters) - U.S. Treasury yields declined
for a second consecutive day on Wednesday as the market took a
cool view of the Federal Reserve's ability to corral inflation
without throwing the economy into recession.
    Fed Chief Jerome Powell said on Wednesday that there is a
risk the Fed's interest rate hikes will slow the economy too
much, but the bigger risk is persistent inflation that allows
public expectations about prices to drift higher.
    "The bigger mistake would be to fail to restore price
stability," Powell said at a European Central Bank conference in
Sintra, Portugal.
    Data on Thursday is expected to show that the personal
consumption expenditures price index remained more than triple
the Fed's 2% inflation target in May.
    World Bank chief economist Carmen Reinhart told Reuters in
an interview she is skeptical that the U.S. and global economies
can dodge a recession, given spiking inflation, sharp hikes in
interest rates and slowing growth in China.
    Stan Shipley, fixed-income strategist at Evercore ISI, said
markets will remain choppy as investors and traders read into
the economic data what they want to see.
    "We're getting slower economic data, some sectors look to be
in recession, other sectors look to be in pretty good shape," he
said. "Ultimately the Fed is going to take down inflation so
that by the time we get into September and October, inflation
data will start to be rolling over," he said.
    The yield on 10-year Treasury notes fell 10.5
basis points to 3.102%, while the two-year's yield
slid 6.5 basis points to 3.059%.
    The gap between the yields on the two- and 10-year notes
, a commonly used metric for indicating a potential
recession when rates at the short end of the yield curve are
higher than the long end, flattened to 3.9 basis points.
    Rates in the middle of the curve already are inverted, with
yields on the three-, five- and seven-year notes higher than the
10-year at 3.134%, 3.162% and 3.180%, respectively.
    There is a risk that U.S. businesses and households could
see price pressures persisting for a long time, Cleveland
Federal Reserve President Loretta Mester said on Wednesday.

    Mester told CNBC that if economic conditions remain the same
she will push for a 75 basis-point rise in rates at the Fed's
next policy meeting on July 26-27.
    The Fed raised its benchmark overnight interest rate two
weeks ago by 75 basis points - its biggest increase since 1994 -
to a range of 1.50% to 1.75%, and signaled its policy rate would
rise to 3.4% by the end of this year.
    The yield on the 30-year Treasury bond fell 9.4
basis points to 3.218%.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
    The 10-year TIPS breakeven rate was last at
2.391%, indicating the market sees inflation averaging about
2.4% a year for the next decade.
    The U.S. dollar 5 years forward inflation-linked swap
, seen by some as a better gauge of inflation
expectations due to possible distortions caused by the Fed's
quantitative easing, was last at 2.429%.

     June 29 Wednesday 2:46 PM New York / 1846 GMT
                                 Price         Current    Net
                                               Yield %    Change
 Three-month bills               1.735         1.7668     -0.013
 Six-month bills                 2.45          2.5152     -0.029
 Two-year note                   99-227/256    3.0588     -0.065
 Three-year note                 99-70/256     3.1337     -0.086
 Five-year note                  100-104/256   3.1615     -0.102
 Seven-year note                 100-112/256   3.1798     -0.104
 10-year note                    98-20/256     3.1022     -0.105
 20-year bond                    96-216/256    3.471      -0.100
 30-year bond                    93-112/256    3.2185     -0.094

                                 Last (bps)    Net
 U.S. 2-year dollar swap spread   33.50          1.25
 U.S. 3-year dollar swap spread   14.50         -0.25
 U.S. 5-year dollar swap spread    3.75          0.75
 U.S. 10-year dollar swap          7.75          0.50
 U.S. 30-year dollar swap        -23.75          1.00

 (Reporting by Herbert Lash
Editing by Peter Graff and Nick Zieminski)

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.

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