TREASURIES-Yields bounce off four-month lows

BY Reuters | TREASURY | 01/19/23 03:41 PM EST
    (Adds quotes, 10-year TIPS auction results, comments from Fed
officials; update prices)
    By Karen Brettell
       NEW YORK, Jan 19 (Reuters) - Benchmark 10-year U.S.
Treasury yields bounced off four-month lows on Thursday as they
neared a key technical level and the recent bond rally looked
overdone for the short-term.
    U.S. bond yields have fallen on investor views that the
Federal Reserve will not be able to raise rates as high and for
as long as it has indicated if the economy soon enters a
    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."
    Fed Vice Chair Lael Brainard said on Thursday that evidence
in favor of a "soft landing" for the U.S. economy, in which
inflation declines without major job losses, appears to be
growing. She added that the Fed is still "probing" for the level
of interest rates that will be adequate to tame inflation.
    Boston Fed President Susan Collins said that the U.S.
central bank will probably need to raise interest rates to "just
above" 5% and then hold them there for a period.
    Fed funds futures traders expect the Fed to hike rates by 25
basis points when its two-day meeting concludes on Feb. 1, from
4.33% now. The Fed's benchmark rate is expected to peak at 4.89%
in June, before declining to 4.39% in December.
    Tom di Galoma, co-head of global rates trading at BTIG in
New York, said that the deeply inverted yield curve and falling
money supply point to a drop in inflation and a "fairly drastic"
hit to the economy, which means that "the Fed will be cutting
rates sooner than people think."
    That said, 10-year yields may move higher in the near term
after the benchmark note's rallying "a little bit too much" and
yields approaching their 200-day moving average, he said.
    The 10-year yields were last at 3.397%, after
earlier dropping to 3.321%, the lowest since Sept. 13. The
200-day moving average was at 3.292%. The yields have fallen
from 3.905% at year-end, and from a 15-year high of 4.338% on
Oct. 21.
    Key parts of the yield curve are deeply inverted, reflecting
concerns about an imminent recession. The two-year, 10-year
curve was last at minus 72 basis points, while
the spread between three-month and 10-year yields
was at minus 128 basis points.
    Two-year yields were last 4.118%, after earlier
reaching 4.041%, the lowest since Oct. 4.
    Yields also moved higher on Thursday after the European
Central Bank pushed back against market bets that it would slow
the pace of its interest rate hikes.
    They had tumbled on Wednesday after data showed U.S. 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 Department saw strong demand for a $17 billion
sale of 10-year Treasury Inflation-Protected Securities (TIPS)
on Thursday.
    The notes sold at a high yield of 1.22%, more than four
basis points below where they traded before the auction. The
bid-to-cover ratio was strong at 2.79 times.
        January 19 Thursday 3:00PM New York / 2000 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.55         4.6663    0.015
 Six-month bills               4.6475       4.8248    0.016
 Two-year note                 100-62/256   4.118     0.042
 Three-year note               100-78/256   3.766     0.047
 Five-year note                101-194/256  3.4846    0.052
 Seven-year note               102-176/256  3.4364    0.037
 10-year note                  106-8/256    3.3969    0.022
 20-year bond                  104-72/256   3.6931    0.031
 30-year bond                  107-240/256  3.5653    0.023

                               Last (bps)   Net
 U.S. 2-year dollar swap        26.50        -0.75
 U.S. 3-year dollar swap        14.50        -0.75
 U.S. 5-year dollar swap         4.50        -1.00
 U.S. 10-year dollar swap       -4.00        -1.00
 U.S. 30-year dollar swap      -40.25        -2.75

 (Reporting by Karen Brettell; Editing by Jane Merriman and
Andrea Ricci)

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.