TREASURIES-U.S. yields fall to kick off 2023

By Chuck Mikolajczak

NEW YORK, Jan 3 (Reuters) - The benchmark U.S. 10-year Treasury yield fell on Tuesday, after two straight weeks of gains to end the prior trading year with its biggest annual gain in decades over concerns about the path of the Federal Reserve's tightening policy.

The 10-year rose about 238 basis points in 2022, its biggest yearly climb since at least 1953, according to Refinitiv data, as the U.S. central bank raised interest rates at its fastest pace since the 1980s to fight stubbornly high inflation after years of loose monetary policy.

The yield on 10-year Treasury notes was down 9 basis points to 3.741%. The yield dipped to as low as 3.724%, its lowest level in a week, and was on pace for its biggest one-day drop since Dec. 13.

"You have some recession concerns that are building probably towards the end of this year or 2024, inflation coming down, those are the factors that typically have been weighing on yields and those factors are more in the forefront as we start 2023 more so than where we left off last year," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"The last couple of weeks, the high inflationary picture, aggressive central bank tightening, those were at the forefront of investors' thinking. Now it has kind of shifted to maybe inflation has peaked and now the Fed will have more of an opportunity to focus more on the economy in that type of scenario."

The yield on the 30-year Treasury bond was

down 9.4 basis points

to

3.844

%.

Forecasts by the U.S. central bank see the fed funds rate climbing above 5% this year, and Fed Chair Jay Powell along with other Fed officials have said there may be a need to keep rates at a higher level for longer to tackle inflation. That represents a higher level than the market is anticipating, with a high of about 4.95% by mid-year according to fed funds futures.

Investors will get a look at several pieces of data on the labor market this week, culminating in the employment report on Friday. A weakening labor market is one of the key pieces seen as needed to convince the Fed to begin slowing its monetary tightening path.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 63.9 basis points. Such an inversion is seen by many as a signal of recession.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2.5 basis points at 4.378%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.351%, after closing at 2.382% on Friday.

The 10-year TIPS breakeven rate was last at 2.282%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Andrea Ricci)