TREASURIES-Yields little changed as Fed officials counter notion rates cuts beckon

BY Reuters | ECONOMIC | 11/28/22 03:15 PM EST
    (Adds remarks from Fed officials, fresh prices)
    By Herbert Lash
       NEW YORK, Nov 28 (Reuters) - Treasury prices pared
earlier gains on Monday after regional Federal Reserve
presidents pushed back on the notion that the U.S. central bank
could soon cut interest rates to revive an economy that is not
robust as a tight labor market may suggest.
    Minutes released last week from the Fed's policy meeting in
early November gave succor to a market hoping the Fed might slow
early next year its fatest and most aggressive rate hiking
campaign in decades.
        The Fed
    needs to raise rates quite a bit further
     to control  inflation and lower it toward the U.S. central
bank's 2% goal, St. Louis Fed President James Bullard said.

        New York Fed President John Williams declined to say
    how fast and how long
     he believes rates need to be raised in coming months, but
he reckoned a rate cut is possible in 2024 as inflation
pressures ease.

        Yields on Treasury notes and bonds trimmed gains to
trade little changed.

        The two-year Treasury yield, which often
moves in step with interest rate expectations,
    slid 0.8 basis points
     at
    4.471
    %, while the yield on benchmark 10-year notes
    rose 0.5 basis points
     to
    3.707
    %.

        The Fed's minutes last week and a soft inflation reading
on Nov. 10 that was taken from data for consumer prices have
been the driving force in the market, said Steven Ricchiuto,
U.S. chief economist at Mizuho Securities USA LLC in New York.

        The market had exuberantly latched onto the idea that
peak inflation had arrived and that the Fed was going to reverse
the  upward course of interest rates, he said.

        "It's just a matter of time before they go from raising
rates to cutting rates," Ricchiuto said tongue in cheek.

        Fed Chairman Jerome Powell "has to reset expectations.
The market has jumped much further than it should have," he
said. "Just because we're slowing down the pace doesn't mean
we're anywhere near done."

    While an end to the Fed's rate hikes is potentially positive
for markets, more consideration needs to be given to the
deteriorating economic outlook along with the possibility that
inflation fears resurface, Mark Haefele, chief investment
officer at UBS Global Wealth Management, said in a note.
    The recent rally in bond prices, which move inversely to
their yield, has put yields on the 10-year note on track in
November to post the biggest monthly decline since the beginning
of the pandemic in March 2020. Bigger monthly declines were
posted in January and February of that year, too.
    The inversion of the yield curve measuring the gap between
two- and 10-year notes deepened further at -76.6
basis points. The inversion, when yields on short-dated debt are
higher than longer-dated debt, indicates a looming recession.
    When the yield on the two-year Treasury equals or exceeds
the 10-year's yield, both tend to be close to their cyclical
peaks, Edward Yardeni, president and chief investment strategist
at Yardeni Research Inc, said in a note to clients.
    The yield on the 30-year Treasury bond was up
0.1 basis points to 3.753%.
        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.356%.
    The 10-year TIPS breakeven rate was last at
2.278%, indicating the market sees inflation averaging about
2.3% a year for the next decade.
    There are no scheduled Treasury auctions this week of
government debt with maturities higher than half a year.
     Nov. 28 Monday 2:53 p.m. New York / 1953 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             4.2025       4.3041    -0.001
 Six-month bills                               4.5275       4.6949    -0.008
 Two-year note                                 100-14/256   4.4711    -0.008
 Three-year note                               100-186/256  4.2357    0.003
 Five-year note                                99-232/256   3.8958    0.005
 Seven-year note                               100-92/256   3.816     0.008
 10-year note                                  103-116/256  3.7071    0.005
 20-year bond                                  100-72/256   3.9793    0.001
 30-year bond                                  104-108/256  3.7529    0.001

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 31.50       ******
 U.S. 3-year dollar swap spread                 12.75       ******
 U.S. 5-year dollar swap spread                  5.25        -0.50
 U.S. 10-year dollar swap spread                -3.00         0.25
 U.S. 30-year dollar swap spread               -44.75         0.25

 (Reporting by Herbert Lash;
Editing by Alison Williams and Chizu Nomiyama)

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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