TREASURIES-Yields dip as inflation remains in focus

BY Reuters | ECONOMIC | 08/12/22 09:41 AM EDT
       By Karen Brettell
    NEW YORK, Aug 12 (Reuters) - U.S. Treasury yields dipped on
Friday after a volatile week as investors evaluated whether an
apparent slowdown in inflation increases could reduce the speed
of Federal Reserve interest rate hikes.
    Data on Thursday showed U.S. producer prices unexpectedly
fell in July. It came a day after news that the Consumer Price
Index (CPI) for July was unchanged on the month, but up at an
annual rate of 8.5%.
    The data has prompted some hopes that the worst of inflation
increases may be in the rear view mirror. Still, many analysts
and investors say that more proof will be needed before it can
be determined how Fed policy could be affected.
    "The theme here is that if indeed the monthly inflation
prints are a little more stable we'll need fewer rate hikes and
then long-term inflation's unlikely to come down quite as far,"
said Guy LeBas, chief fixed-income strategist at Janney
Montgomery Scott in Philadelphia.
    However, "I would maintain skepticism until we at least see
one or two more inflation prints that signal that rate hikes are
ready to slow," LeBas said.
    Low liquidity has also added to market volatility with many
traders out for summer holidays, and as some investors are wary
to take positions until there is more clarity on the outlook.
    Benchmark 10-year note yields dipped five basis
points to 2.839%, after reaching 2.902% on Thursday, the highest
since July 22. Two-year note yields fell six basis
points to 3.174%.
    The closely watched yield curve between two- and 10-year
notes was at minus 34 basis points, and has
steepened after reaching minus 56 basis points on Wednesday, the
deepest inversion since 2000.
    An inversion in this part of the yield curve is viewed as a
reliable indicator that a recession will follow in 12-to-18
    Investors are debating whether the Fed will hike rates by 50
basis points or 75 basis points when it meets in September.
    Fed funds futures traders are now pricing in a 64% chance of
a 50-basis-point hike and a 36% chance of a 75-basis-point
    The fed funds rate is expected to rise to 3.59% by March,
from 2.33% now.
    San Francisco Fed President Mary Daly said on Thursday that
while a half-percentage-point interest rate hike in September
"makes sense", she is open to the possibility of a bigger hike
to fight too-high inflation.
    Data on Friday showed that U.S. import prices posted their
first decline in seven months in July on lower costs for both
fuel and nonfuel products.

    August 12 Friday 9:22AM New York / 1322 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.51         2.5604    0.002
 Six-month bills               2.9425       3.0274    -0.017
 Two-year note                 99-172/256   3.1736    -0.055
 Three-year note               100-4/256    3.1195    -0.058
 Five-year note                99-40/256    2.9339    -0.054
 Seven-year note               98-68/256    2.9019    -0.049
 10-year note                  99-60/256    2.8385    -0.049
 20-year bond                  98-192/256   3.3367    -0.057
 30-year bond                  97-160/256   3.1225    -0.036

                               Last (bps)   Net
 U.S. 2-year dollar swap        31.25         2.00
 U.S. 3-year dollar swap        12.50         1.50
 U.S. 5-year dollar swap         4.50         0.50
 U.S. 10-year dollar swap        5.00         0.00
 U.S. 30-year dollar swap      -30.25         1.25

 (Editing by David Evans)

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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