TREASURIES-Yield curve inversion deepens, next week's FOMC minutes in focus

BY Reuters | ECONOMIC | 11/18/22 09:51 AM EST
       By Karen Brettell
       NEW YORK, Nov 18 (Reuters) - A key part of the U.S.
Treasury yield curve inverted further on Friday as investors
priced for the likelihood that growth will stall as the Federal
Reserve continues to hike rates in an effort to stamp out
historically high inflation.
    Surprisingly strong retail sales data on Wednesday boosted
expectations that the U.S. central bank will continue tightening
monetary policy even after softer than expected consumer and
producer price pressures raised hopes that rate hikes could be
nearing an end and sent yields tumbling sharply.
    "The market significantly overreacted to the October CPI
report and the Fed tried very hard to push back through the
speakers," said Gennadiy Goldberg, interest rate strategist at
TD Securities in New York.
    Boston Fed President Susan Collins said on Friday the
central bank has more rate rises ahead of it as it seeks to
lower inflation, while adding she hopes the likely path for
monetary policy will not wound the U.S. economy too badly.
    St Louis Fed President James Bullard said on Thursday that
the Fed's target policy needs to rise to at least a range
between 5.00% and 5.25% from the current level of just below
4.00% to be "sufficiently restrictive" to curb inflation.
    Minutes from the Fed's November meeting released next
Wednesday could offer new insight into how high officials
ultimately expect to hike rates.
    Fed funds futures traders are now pricing for the fed funds
rate to rise to 5.01% by May, from 3.83% now.
Expectations of the terminal rate had dropped to 4.89% on
Tuesday.
    "There's more tightening to go. I think markets still have
to be persuaded of that," said Goldberg.
    Benchmark 10-year yields were last at 3.765%,
after falling to 3.671% on Wednesday, the lowest since Oct. 5.
They have fallen from a 15-year high of 4.338% on Oct. 21.
    Two-year Treasury yields were at 4.467% and are
holding above a two-week low of 4.290% reached on Nov. 10 after
the CPI data. They are down from 4.883% on Nov. 4, which was
also a 15-year high.
    The inversion in the key two-year, 10-year part of the
Treasury yield curve deepened on concerns about an impending
recession. It was at minus 70 basis points,
nearing levels last reached in 2000.
    The Fed is widely expected to hike rates by an additional 50
basis points at its December 13-14 meeting. The size of any rate
increase, however, could be swayed by consumer price data for
November that is due on Dec. 13.
    November 18 Friday 9:34AM New York / 1434 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             4.1525       4.2529    0.019
 Six-month bills               4.4575       4.6213    0.022
 Two-year note                 99-212/256   4.4671    0.013
 Three-year note               100-192/256  4.2295    0.007
 Five-year note                100-208/256  3.942     0.005
 Seven-year note               100-206/256  3.8664    -0.006
 10-year note                  102-248/256  3.7654    -0.008
 20-year bond                  98-220/256   4.084     -0.030
 30-year bond                  102-120/256  3.8603    -0.029

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        31.50         0.25
 spread
 U.S. 3-year dollar swap        15.00         0.75
 spread
 U.S. 5-year dollar swap         4.25         0.50
 spread
 U.S. 10-year dollar swap       -2.00         1.25
 spread
 U.S. 30-year dollar swap      -43.50         1.50
 spread


 (Reporting by Karen Brettell; Editing by Emelia
Sithole-Matarise)

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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