TREASURIES-U.S. Treasury yields plunge as market prices lower inflation

BY Reuters | TREASURY | 07/01/22 11:01 AM EDT
       By Herbert Lash
    NEW YORK, July 1 (Reuters) - U.S. Treasury yields tumbled on
Friday, with the breakeven rate on longer-dated
inflation-protected bonds falling to nine-month lows, on market
expectations elevated U.S. consumer prices will come down close
to the Federal Reserve's inflation target.
    The yield on 10-year Treasury notes fell 17.9
basis points to 2.795%, while the two-year yield,
which typically moves in step with interest rate expectations,
slid 19.4 basis points to 2.733%. Both were at four-week lows.
    The breakeven rates on five- and 10-year Treasury
Inflation-Protected Securities, or TIPS, slid to 2.583% and
2.325%, respectively to rates last seen in September 2021.
    "The breakeven market, the difference between TIPS versus
regular Treasuries, is dramatically downward sloping. It's
barely above the Fed's long-term average target of 2%," said
Nancy Davis, managing partner and chief investment officer at
Quadratic Capital Management LLC in Greenwich, Connecticut.
    "The market is pricing that the Fed's hiking rates is going
to dramatically bring down future CPI inflation," she said.
    Uncertainty about when inflation will peak and how deep and
long a likely recession will be is driving all security markets,
whether credit or equities, said Dec Mullarkey, managing
director of investment strategy and asset allocation at SLC
Management in Boston.
    "Central banks are saying the biggest threat out there is
inflation and we're going do whatever it takes to get that under
control," Mullarkey said. "That's the message that the markets
have priced into their securities. They're saying 'there's a lot
of risk, there's a lot of volatility.'"
    The gap between yields on two- and 10-year Treasury notes
, seen as an indicator of a potential recession when
the short end of the yield curve inverts and rises above the
long end, was at 6.0 basis points.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
    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 2.341%.

        July 1 Friday 10:33 AM New York / 1433 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.65         1.6795    -0.021
 Six-month bills               2.4          2.4624    -0.043
 Two-year note                 100-132/256  2.7314    -0.196
 Three-year note               100-78/256   2.7662    -0.214
 Five-year note                102-40/256   2.7838    -0.220
 Seven-year note               102-166/256  2.8295    -0.201
 10-year note                  100-176/256  2.7945    -0.179
 20-year bond                  99-168/256   3.2735    -0.105
 30-year bond                  96-220/256   3.0356    -0.086

                               Last (bps)   Net
 U.S. 2-year dollar swap        28.25        -2.75
 U.S. 3-year dollar swap         9.25        -3.25
 U.S. 5-year dollar swap         2.25        -0.75
 U.S. 10-year dollar swap        6.25        -1.00
 U.S. 30-year dollar swap      -25.50        -2.00

 (Reporting by Herbert Lash
Editing by Marguerita Choy)

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.