TREASURIES-U.S. yields drop ahead of economic data, Fed minutes

BY Reuters | ECONOMIC | 01/04/23 09:59 AM EST

By Chuck Mikolajczak

NEW YORK, Jan 4 (Reuters) - The benchmark U.S. 10-year Treasury yield fell on Wednesday, putting it on track for its longest streak of declines in more than five months, as investors weighed the path of the Federal Reserve's interest rate hikes with the likelihood of a recession.

Later on Wednesday, investors will eye data on U.S. manufacturing and the labor market for signs of weakening, as well as the minutes from the U.S. central bank's December meeting for clues on when the Fed will begin to dial down the tightening of its monetary policy.

"Now we sort of face this upcoming data this morning and the minutes this afternoon in sort of a difficult technical spot where if 10s continue to trade below 3.65% we could see still another downdraft just because people were anticipating that we would hold at least 3.80% and we are nowhere close to doing that," said Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee.

"There is not a great deal of thought behind these market moves, there are a lot of startled investors that are moving quickly because the market is moving in the opposite direction than they expected, we will have far more information and a more professional response once we get through the numbers this morning, the Fed minutes this afternoon and then the payroll data on Friday."

The yield on 10-year Treasury notes was down 11.5 basis points to 3.677% and on pace for its biggest one-day drop since Dec. 1.

Yields briefly moved higher after Minneapolis Fed President Neel Kashkari said the Fed should continue to raise rates at its next few meetings until it is confident that inflation has peaked, and laid out his own view that the policy rate should first pause at 5.4%, which is more aggressive than the majority of policymakers.

The yield on the 30-year Treasury bond was

down 11.1 basis points




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 seen as one of the key pieces 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 65.6 basis points. Such an inversion is seen by many as a signal of an impending recession.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 7.5 basis points at 4.331%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.269%, after closing at 2.306% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.228%, indicating the market sees inflation averaging 2.2% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Paul Simao)

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.

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