TREASURIES-U.S. yields mixed with front-end lower as inflation slows

BY Reuters | TREASURY | 01/12/23 10:29 AM EST
    (Recasts, adds analyst comment, bullets, U.S. rates table,
updates prices)

      U.S. consumer prices dip in December for 1st time since
May 2020

      U.S. two-year/10-year yield curve narrows inversion

      U.S. futures see two 25 bps hikes each for next two

      Focus on U.S. 30-year bond auction

    By Gertrude Chavez-Dreyfuss
       NEW YORK, Jan 12 (Reuters) - U.S. Treasury yields were
mixed in choppy trading, with the front end of the curve lower
on Thursday, after data showing an unexpected fall in consumer
prices in December, affirming expectations that the Federal
Reserve will continue to slow the pace of rate increases.
    The long end, however, led by the benchmark 10-year note
showed higher yields as investors digested the inflation report.
The bottom line is that even with inflation easing, the prospect
of rate cuts is not in the near-term horizon.
    A closely-tracked part of the U.S. yield curve, measuring
the gap between yields on two- and 10-year Treasury notes
, narrowed its inversion to -62 basis points
(bps). The inversion, which typically precedes recession, went
as deep as -85.80 bps right after the inflation data, the most
inverted in four weeks.
    The narrowing of the curve inversion suggested that
investors are pricing in fewer rate hikes by the Fed.
    Thursday's data showed the consumer price index dipped 0.1%
last month after gaining 0.1% in November. That was the first
fall in the CPI since May 2020, when the economy was reeling
from the first wave of COVID-19 infections.
    In the 12 months through December, the CPI increased 6.5%,
the smallest rise since October 2021 and followed a 7.1% advance
in November.
    "I think that the as-expected headline and core CPI print
have really contributed to the notion that the Fed will be
downshifting again, whether it's at February or at the March
meeting remains to be seen, and we're going to be watching the
incoming Fed speak for any guidance throughout the day in that
regard," said Ian Lyngen, head of U.S. rates strategy, at BMO
Capital Markets in New York.
    "The fact that we have seen core inflation decelerate to
5.7% year-over-year, from 6% in November, reinforces the peak
inflation argument."
    In mid-morning trading, U.S. benchmark Treasury 10-year
yield was flat at 3.55%.
    U.S. two-year yield slid 5.6 bps to 4.171%.
    U.S. 30-year yields rose 2.1 bps to 3.70.
    Investors are also gearing up for the auction of U.S.
30-yearn bonds later on Thursday.
    The U.S. rate futures market has priced two 25-bps hikes in
the next two meetings.
    In other parts of the Treasuries market, U.S. breakeven
inflation rates rose broadly.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) rose to
2.264%. The five-year breakeven rate meant that investors expect
inflation, as measured by CPI to average around 2.264% over the
next five years.
    The 10-year TIPS breakeven rate USBEI10Y=RR was last at
2.238%, up 1.6 bps.
      January 12 Thursday 10:08AM New York / 1508 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.525        4.6403    -0.037
 Six-month bills               4.6575       4.8354    -0.036
 Two-year note                 100-37/256   4.1718    -0.056
 Three-year note               100-10/256   3.861     -0.064
 Five-year note                101-34/256   3.6234    -0.047
 Seven-year note               101-192/256  3.5886    -0.028
 10-year note                  104-188/256  3.5501    -0.006
 20-year bond                  101-224/256  3.8635    0.016
 30-year bond                  105-88/256   3.7024    0.021

                               Last (bps)   Net
 U.S. 2-year dollar swap        28.00         0.75
 U.S. 3-year dollar swap        14.50         1.25
 U.S. 5-year dollar swap         2.75         0.75
 U.S. 10-year dollar swap       -4.00         0.75
 U.S. 30-year dollar swap      -42.00         1.75

 (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Karen Brettell
Editing by Nick Zieminski)

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