TREASURIES-U.S. Treasury yields fall in anticipation inflation slowing

BY Reuters | ECONOMIC | 01/11/23 02:44 PM EST
    (Adds 10-year debt auction, comment, fresh prices)
    By Herbert Lash
       NEW YORK, Jan 11 (Reuters) - Treasury yields fell on Wednesday, a day
before the release of key consumer price data, with the market anticipating that
inflation is on a sustainable downward path and the Federal Reserve will cut
interest rates by year end.
    Economists polled by Reuters project CPI to slow to 6.5% in December from
7.1% the prior month, an expectation that is driving a rally in equity and bond
    The yield on benchmark 10-year Treasury notes fell 5.9 basis
points to 3.560%. 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, that 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 earlier in
the session as the front-end assumes the Fed will continue to raise rates and
get to 5%, whether in February or by the end of March, Ricchiuto said.
    Boston Fed President Susan Collins said she is inclined to raise interest
rates by 25 basis points at the U.S. central bank's policy meeting ending on
Feb. 1, the New York Times reported on Wednesday.
    Futures are pricing in the Fed's target rate will be 4.947% in June, but
then foresee it falling to 4.458% by December, indicating the Fed will have cut
    The Fed likely faces a big battle over the next six months as the market
aggressively prices in rate cuts or policymakers finally agree it's time to cut,
said Marvin Loh, senior global macro strategist at State Street.
        "It ultimately depends on if the Fed is going to be able to start
cutting rates the way the market expects or as they keep saying, 'We might have
to be here longer than you expect,'" Loh said.

        Kevin Flanagan, head of fixed income strategy at WisdomTree, said the
market is underestimating the resolve of Fed Chair Jerome Powell and
policymakers to not quickly cut rates, at least in the next six months.

        "Stopping rate hikes is not a pivot. A pivot is going from rate hikes to
a rate cut. That is something that the Fed is not going to entertain I believe
in the first six months in the year," he said.

        The Treasury sold
    $32 billion of 10-year notes
     at a high yield of 3.575%, just below the market value at the bidding
deadline. On Thursday, $18 billion of 30-year bonds are scheduled to be sold.

    The gap between yields on two- and 10-year Treasury notes, a
recession harbinger when short-end yields are higher than longer-dated
securities, in what's known as an inverted yield curve, was at -67.9 basis
    "History tells us when you have inverted yield curve to the magnitude and
the duration that we've had so far, that some type of a recession is coming,"
Flanagan said.
    The two-year yield, which often reflects interest rate
expectations, slid 2.1 basis points at 4.237%, while yield on the 30-year bonds
 fell 6.7 basis points to 3.687%.
        The breakeven rate on five-year U.S. Treasury inflation-protected
securities (TIPS) was last at 2.227%.
    The 10-year TIPS breakeven rate was last at 2.216%, indicating
the market sees inflation averaging 2.2% a year for the next decade.
     Jan. 11 Wednesday 1:29 p.m. New York / 1929 GMT
                                               Price        Current   Net
                                                            Yield %   Change
 Three-month bills                             4.56         4.6772    -0.011
 Six-month bills                               4.6925       4.8733    -0.014
 Two-year note                                 100-6/256    4.2367    -0.021
 Three-year note                               99-214/256   3.9336    -0.036
 Five-year note                                100-228/256  3.6769    -0.055
 Seven-year note                               101-142/256  3.6203    -0.060
 10-year note                                  104-168/256  3.5595    -0.059
 20-year bond                                  102-4/256    3.8534    -0.066
 30-year bond                                  105-160/256  3.6874    -0.067

                                               Last (bps)   Net
 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                  2.00         1.50
 U.S. 10-year dollar swap spread                -5.00         1.25
 U.S. 30-year dollar swap spread               -43.75         2.50

 (Reporting by Herbert Lash; editing by Barbara Lewis and Leslie Adler)

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