TREASURIES-Yields bounce off four-month lows, Fed speakers in focus

BY Reuters | ECONOMIC | 01/19/23 10:18 AM EST
       By Karen Brettell
       NEW YORK, Jan 19 (Reuters) - Benchmark 10-year U.S.
Treasury yields bounced off four-month lows on Thursday as
investors waited on comments from Federal Reserve officials for
further guidance on Fed policy and as the European Central Bank
pushed back against market expectations of slowing rate hikes.
    U.S. bond yields have fallen as investors fear that the U.S.
central bank will not be able to raise rates as high and for as
long as it has indicated if the economy soon enters a downturn.
    Fed officials have stressed that they will need to raise
rates above 5% and hold them there for a period of time in order
to bring down inflation.
    "The market's penciling in the view that a recession is
imminent and that's something that I think the Fed probably
disagrees with at the moment," said Gennadiy Goldberg, an
interest rate strategist at TD Securities in New York. "They do
see things as slowing down, but not so much that the U.S. is
currently in a recession or about to enter one."
    Comments from Fed officials including Vice Chair Lael
Brainard and New York Fed president John Williams on Thursday
will be watched for signs of whether a 50 basis point interest
rate increase is on the table when the U.S. central bank
concludes its two-day meeting on Feb. 1.
    Fed funds futures traders are overwhelming pricing for a 25
basis points increase at February's meeting. The Fed's benchmark
rate is also expected to peak at 4.89% in May, before declining
to 4.40% in December.
    Benchmark 10-year yields were last at 3.397%,
after earlier dropping to 3.321%, the lowest since Sept. 13. The
yields have fallen from 3.905% at year-end, and from a 15-year
high of 4.338% on Oct. 21.
    The yields moved back higher on Thursday after the European
Central Bank pushed back against market bets that it would slow
the pace of its interest rate hikes. Some see the recent bond
rally as also being overstretched for the near-term.
    Two-year yields were last 4.105%, after earlier
reaching 4.041%, the lowest since Oct. 4.
    Key parts of the yield curve also remained deeply inverted,
reflecting concerns about an imminent recession. The two-year,
10-year curve was last at minus 71 basis points,
while the spread between three-month and 10-year yields
 was at minus 129 basis points.
    Yields tumbled on Wednesday after data showed retail sales
fell by the most in a year in December, while producer price
inflation fell 0.5% in the month. A separate report also showed
that manufacturing output dropped 1.3% in December, the largest
decline since February 2021.
    Data on Thursday showed that the number of Americans filing
new claims for unemployment benefits unexpectedly fell last
week, while U.S. single-family homebuilding rebounded in
    This week's bond rally has also been spurred by relief after
the Bank of Japan on Tuesday failed to lift its bond yield cap
as some had expected.
    The Treasury will sell $17 billion in 10-year Treasury
Inflation-Protected Securities (TIPS) on Thursday.
      January 19 Thursday 9:56AM New York / 1456 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.565        4.6818    0.031
 Six-month bills               4.66         4.8381    0.029
 Two-year note                 100-68/256   4.1054    0.029
 Three-year note               100-86/256   3.7549    0.036
 Five-year note                101-210/256  3.4708    0.038
 Seven-year note               102-180/256  3.4339    0.035
 10-year note                  106-8/256    3.3969    0.022
 20-year bond                  104-84/256   3.6899    0.028
 30-year bond                  107-232/256  3.5669    0.025

                               Last (bps)   Net
 U.S. 2-year dollar swap        27.50         0.25
 U.S. 3-year dollar swap        14.50        -0.75
 U.S. 5-year dollar swap         5.00        -0.50
 U.S. 10-year dollar swap       -3.25        -0.25
 U.S. 30-year dollar swap      -38.75        -1.25

 (Editing by Jane Merriman)

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.