TREASURIES-Yields lower as China data renews global economy concerns

BY Reuters | ECONOMIC | 08/15/22 09:52 AM EDT
       By Davide Barbuscia
    NEW YORK, Aug 15 (Reuters) - U.S. Treasury yields were
slightly lower on Monday as weak economic data from China
renewed concerns over the health of the global economy, while
the market continued to assess to what extent a slowdown in
inflation could impact the U.S. Federal Reserve's monetary
tightening policies.
    In a surprise move, China's central bank cut key lending
rates on Monday to revive demand as data showed the economy
slowed in July, with factory and retail activity impacted by
Beijing's zero-COVID policy and a property crisis.
    "China is the second biggest economy so if there's a
material slowdown there and China feels like it has to cut
rates, that says something about the strength of the global
economy," said Steven Abrahams, senior managing director at
Amherst Pierpont Securities.
    Benchmark 10-year Treasury yields were down to
2.793% from a 2.849% close last week. Two-year note yields
 fell to 3.2% from 3.257%.
    Data last week showed U.S. producer prices unexpectedly fell
in July and the Consumer Price Index (CPI) for July was
unchanged on the month, but up at an annual rate of 8.5%.
    This may suggest a peak in inflation increases and a
slowdown in the Fed's interest rate hikes, although many in the
market remained skeptical and said more evidence of a slowdown
in price pressure was needed.
    Fed funds futures traders are now pricing in a 63.5% chance
of a 50-basis-point hike in September and a 36.5% chance of a
75-basis-point increase. They expect the fed funds rate to hit
about 3.6% in March next year and decline after that.
    "Everybody is still trying to figure out where they think
the Fed will go next year," said Abrahams.
    "Our feeling is that the market continues to underestimate
how high terminal Fed funds will go, so we're expecting the
yield curve to continue inverting pretty significantly," he
said, referring to the point were the federal funds rate will
peak.
    The closely watched yield curve between two- and 10-year
notes was at minus 42.4 basis points on Monday.
It reached minus 56 basis points on Wednesday last week, 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 12-18 months.

      August 15 Monday 9:29AM New York / 1329 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.5075       2.5576    -0.005
 Six-month bills               2.9675       3.0533    -0.014
 Two-year note                 99-162/256   3.1946    -0.062
 Three-year note               100-2/256    3.1222    -0.072
 Five-year note                99-84/256    2.8963    -0.081
 Seven-year note               98-160/256   2.8441    -0.082
 10-year note                  99-200/256   2.7752    -0.074
 20-year bond                  99-104/256   3.2909    -0.047
 30-year bond                  98-152/256   3.0721    -0.046

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        30.75         0.75
 spread
 U.S. 3-year dollar swap        12.50         0.50
 spread
 U.S. 5-year dollar swap         4.25         0.00
 spread
 U.S. 10-year dollar swap        4.25        -0.50
 spread
 U.S. 30-year dollar swap      -32.00        -0.75
 spread


 (Reporting by Davide Barbuscia, editing by Ed Osmond)

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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