TREASURIES-U.S. yields slump as inflation softens, Fed seen slowing rate hike pace

BY Reuters | TREASURY | 01/12/23 04:19 PM EST
    (Corrects first paragraph to show yields fell, not 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. rate futures see 25 bps hikes in next two meetings

      U.S. 30-year bond auction shows high demand

    By Gertrude Chavez-Dreyfuss
       NEW YORK, Jan 12 (Reuters) -
    U.S. Treasury yields fell on Thursday in choppy trading,
after data showed headline consumer prices fell in December for
the first time in 2-1/2 years, affirming expectations that the
Federal Reserve will continue to slow the pace of rate

        U.S. benchmark 10-year note and 30-year bond yield sank
to four-week lows.

    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 -68.5 basis points
(bps) from its level earlier in the session. 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 Fed rate hikes.
    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.
        "The supersized Fed rate hikes are behind us - the CPI
data put the Fed back on the 25 basis point track," said Jamie
Cox, managing partner, Harris Financial Group in Richmond,

        "These data show what everyone already knew - inflation
peaked several months ago and we are on the road back to stable
prices. The Fed has a real chance of sticking the soft landing
if these data continue to fall at current rates - it's very
possible we could reclaim 2% inflation by mid-year."

    In afternoon trading, the U.S. 10-year yield sank 12 bps at
    U.S. two-year yield slid 9.2 bps to 4.136%.
    U.S. 30-year yields fell 12 bps to 3.562%.
        The U.S. Treasury's
    sale of 30-year bonds
     was well-received, with the auction stopping at 3.585%,
below the expected yield at the bid deadline, suggesting that
investors were willing to settle for a lower rate for the bond.

    The U.S. rate futures market has priced two 25-bps hikes in
the next two meetings. The market also projected that the fed
funds rate will peak just below 5% at the June meeting.

    Fed policymakers
     on Thursday expressed relief that price pressures were
easing, but they signaled the U.S. central bank's target rate
was still likely to rise above 5% and stay there for some time
despite market bets to the contrary.

        For instance, St. Louis Fed President
    James Bullard
     once again stated a preference for getting the Fed's policy
rate north of 5% "as soon as possible."

        In other parts of the Treasuries market, U.S. breakeven
inflation rates were mixed, with those on the long end of the
curve lower on the day.

        The breakeven rate on two-year U.S. Treasury
Inflation-Protected Securities (TIPS) rose to
2.11%, up 5.4 bps. The two-year breakeven rate meant that
investors expect inflation, as measured by CPI to average around
2.11% over the next two years.

    The 10-year TIPS breakeven rate, on the other
hand, was last at 2.209%, down 1 bp.
          January 12 Thursday 3:52PM New York / 2052 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.4925       4.6066    -0.070
 Six-month bills               4.6175       4.7929    -0.078
 Two-year note                 100-56/256   4.1321    -0.096
 Three-year note               100-56/256   3.7969    -0.128
 Five-year note                101-148/256  3.5254    -0.145
 Seven-year note               102-110/256  3.4789    -0.138
 10-year note                  105-192/256  3.4309    -0.125
 20-year bond                  103-216/256  3.7239    -0.124
 30-year bond                  108-40/256   3.5541    -0.127

                               Last (bps)   Net
 U.S. 2-year dollar swap        28.75         1.50
 U.S. 3-year dollar swap        15.50         2.25
 U.S. 5-year dollar swap         3.50         1.50
 U.S. 10-year dollar swap       -3.50         1.25
 U.S. 30-year dollar swap      -39.75         4.00

 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick
Zieminski and Richard Chang)

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