TREASURIES-U.S. yields fall as market anticipates inflation slowing

BY Reuters | TREASURY | 01/11/23 11:09 AM EST
    (Corrects to say CPI, not "core" CPI, in paragraph 2)
    By Herbert Lash
       NEW YORK, Jan 11 (Reuters) - Longer-dated Treasury
yields fell on Wednesday, a day before the release of consumer
price data as the market anticipates inflation is on a
sustainable downward path and the Federal Reserve will cut
interest rates by the year end.
    Economists polled by Reuters project CPI to slow to 6.5% in
December from 7.1% the prior month, an expected reading that is
driving a rally in equity and bond markets.
    The yield on benchmark 10-year Treasury notes
fell 4.1 basis points to 3.578%, as yields on all longer-dated
notes and bonds slid. Yields move inversely to their price.
    "The market is really expecting the Fed to roll over fairly
quickly and the long end is basically assuming the Federal
Reserve will achieve its inflation goals, inflation is going to
come down," said Steven Ricchiuto, U.S. chief economist at
Mizuho Securities USA LLC in New York.
    Yields on shorter-dated debt under two years were slightly
higher as the front-end makes the assumption that the Fed will
continue to raise rates and get to 5%, whether in February or by
the end of March, Ricchiuto said.
    Futures are pricing in the Fed's target rate will be 4.947%
in June, but then it will fall to 4.465% by December, indicating
the Fed has cut rates.
    "There's a big battle that the Fed has over the next six
months. Either it contends with a market that it is too
aggressive around Fed rate cuts, or it winds up agreeing that
it's time to cut rates," said Marvin Loh, senior global macro
strategist at State Street.
    The bond market is trying to make sense of how the economy
performs after either a hard or soft land as the inverted yield
curve still projects a pretty hard recession, Loh said.
    "The bond markets are starting to grasp hold of this growth
story," he said. "It's really a degree of if it's a mild
recession or a hard recession."
    The gap between yields on two- and 10-year Treasury notes
, a recession harbinger when short-end yields are
higher, or showing an inverted yield curve, than longer-dated
securities, was at -67.7 basis points.
    The two-year yield, which often reflects interest
rate expectations, slid 0.5 basis points at 4.253%, while yield
on the 30-year bonds fell 6.2 basis points to
3.692%.
        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.23%.
    The 10-year TIPS breakeven rate was last at
2.222%, indicating the market sees inflation averaging 2.2% a
year for the next decade.
     Jan. 11 Wednesday 9:43 a.m. New York / 1543 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             4.57         4.6876    0.000
 Six-month bills                               4.71         4.8919    0.005
 Two-year note                                 99-254/256   4.2534    -0.005
 Three-year note                               99-200/256   3.9531    -0.017
 Five-year note                                100-210/256  3.6925    -0.039
 Seven-year note                               101-116/256  3.6368    -0.043
 10-year note                                  104-128/256  3.5779    -0.041
 20-year bond                                  101-232/256  3.8613    -0.058
 30-year bond                                  105-136/256  3.6924    -0.062

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 27.50        -0.50
 U.S. 3-year dollar swap spread                 13.50         2.00
 U.S. 5-year dollar swap spread                  1.50         1.00
 U.S. 10-year dollar swap spread                -5.25         1.00
 U.S. 30-year dollar swap spread               -44.00         2.25

 (Reporting by Herbert Lash; editing by Barbara Lewis)

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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