TREASURIES-U.S. yields drop on data showing slowing economy

BY Reuters | TREASURY | 01/06/23 11:34 AM EST
    (Adds new comment, U.S. services sector, factory orders data,
updates prices)

      U.S. jobs rise more than expected, but wage rise slows

      U.S. services sector contracts in December, factor orders

      U.S. rates market price in two 25-bps hikes in next two

      U.S. two-year/10-year curve lessens inversion after jobs

    By Gertrude Chavez-Dreyfuss
       NEW YORK, Jan 6 (Reuters) - U.S. Treasury yields tumbled
on Friday after data showed signs of an economy slowing down as
wages rose less than expected last month even though new jobs
increased more than anticipated, while the U.S. services sector
shrank for the first time in more than 2-1/2 years.
    U.S. factory orders also declined in November after posting
gains in the previous month, suggesting that along with other
pieces of economic data, past rate increases by the Federal
Reserve may be finally taking its toll on the economy.
    Friday's reports also reinforced expectations that the Fed
could be nearing a pause in its rate-hiking cycle.
    U.S. yields across the curve mostly dropped to two-week lows
in the aftermath of the services sector and factory orders data.
    A widely-tracked part of the U.S. yield curve, measuring the
gap between yields on two- and 10-year Treasury notes
, lessened its inversion to -69.2 basis points
(bps). The inversion, which typically foreshadows recession,
went as deep as -79.20 bps right after the jobs report, the most
inverted in three weeks.
    The narrowing of the curve inversion on Friday indicated
that investors are pricing in less rate hikes by the Fed.
    Data showed that U.S. non-farm payrolls rose 223,000 last
month. Economists polled by Reuters had forecast payrolls
increasing by 200,000 jobs.
    Average hourly earnings rose 0.3% in December after 0.4% in
the prior month. That reduced the year-on-year increase in wages
to 4.6% from 4.8% in November.
    "The Federal Reserve has indicated that they are willing to
pause and let cumulative effects of past rate hikes continue to
filter through the system," said Keith Buchanan, portfolio
manager at GLOBALT Investments in Atlanta.
    "I definitely think the Fed is looking for a moment to pause
and this report can lead them to do it. Of course, we would need
other reports to confirm this," he added.
    Data also showed that the Institute for Supply
Management's(ISM) non-manufacturing index dropped to 49.6 last
month from 56.5 in November. It was the first time since May
2020 that the services reading fell below the 50 threshold,
which indicates contraction in the sector that accounts for more
than two-thirds of U.S. economic activity.
    Paul Ashworth, chief North America economist, at Capital
Economics wrote in a note that the ISM data showed "more
evidence of disinflationary pressure but, unlike the employment
Report, consistent with recession rather that a soft landing."
    U.S. factory orders also slumped, falling 1.8% in November
after gaining 0.4% in October.
    In late morning trading, U.S. 10-year yields
slid to two-week troughs of 3.571%. The yield was last down 14.4
14.4 bps at 3.578%.
    U.S. 30-year yields also declined to a two-week low of
3.69%, last down 10.4 bps at 3.694%.
    On the shorter-end of the curve, U.S. two-year yields also
stumbled to its lowest in two weeks. They last traded down 18.5
bps at 4.268%.
    The rate futures market has priced in 25-bps hikes at the
next two policy meetings. The peak fed funds rates is seen at
5%, expected to be reached at the June policy gathering.

    In other segments of the Treasuries market, the U.S.
breakeven inflation rates were mostly lower, reversing earlier
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.244%. The five-year breakeven rate suggested that investors
expect inflation, as measured by the consumer price index, to
average around 2.244% over the next five years.
    The 10-year TIPS breakeven rate was last at
2.21%, down 1.5 bps.
      January 6 Friday 11:18AM New York / 1618 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5275       4.6412    0.019
 Six-month bills               4.6525       4.8282    -0.021
 Two-year note                 99-244/256   4.2744    -0.179
 Three-year note               99-242/256   4.0191    -0.183
 Five-year note                100-158/256  3.7377    -0.173
 Seven-year note               101-68/256   3.6676    -0.163
 10-year note                  104-128/256  3.5783    -0.144
 20-year bond                  101-244/256  3.858     -0.114
 30-year bond                  105-144/256  3.6907    -0.107

                               Last (bps)   Net
 U.S. 2-year dollar swap        29.50         1.25
 U.S. 3-year dollar swap        10.75         0.50
 U.S. 5-year dollar swap         0.75         0.25
 U.S. 10-year dollar swap       -5.75        -0.50
 U.S. 30-year dollar swap      -47.00        -0.75

 (Reporting by Gertrude Chavez-Dreyfuss; editing by David Evans)

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