TREASURIES-U.S. yields climb as investors focus on growth ahead of Fed meeting

BY Reuters | ECONOMIC | 01/23/23 10:47 AM EST
       By Davide Barbuscia
       NEW YORK, Jan 23 (Reuters) - U.S. Treasury yields kept
creeping up on Monday, further eroding a recent bond rally that
some investors think was overdone in reflecting fears that the
U.S. economy may soon enter a recession.
    U.S. bond yields dropped to four-month lows on Thursday last
week on expectations that the Federal Reserve, whose next
interest rate-setting meeting is scheduled next week, will be
forced to pivot to a more dovish policy if the U.S. economy
shrinks this year, as many fear.
    But yields - which move inversely to prices - started rising
on Friday, and on Monday they kept climbing, with both the
benchmark 10-year Treasury yield and two-year yields
 up about 3 basis points to 3.513% and 4.21%,
    "People started to price out the recession," said Zhiwei
Ren, managing director and portfolio manager at Penn Mutual
Asset Management. "The market consensus is that we're switching
from a recession in Q1-Q2 to a soft landing ... so if there's no
recession, rates don't have to go down a lot," he said.
    A soft landing scenario is one in which the Fed manages to
tame inflation without pushing the economy into a recession.
    Investors will be looking at the Commerce Department's
advance release of fourth-quarter gross domestic product on
Thursday for further clues on the impact of higher interest
rates on the economy. The data is expected to confirm that the
U.S. economy ended the year on a positive note, Tiffany Wilding,
PIMCO North American economist, and Allison Boxer, PIMCO
economist, said in a note.
    Meanwhile, Fed officials last week said the U.S. central
bank may scale back to slower rate hikes amid signs that hot
inflation is cooling off. They were speaking ahead of a
communications blackout which will last until the central bank's
next meeting on Jan. 31 and Fed. 1.
    The Fed is largely expected to raise rates by 25 basis
points at the conclusion of its next meeting, and investors will
be watching for any new signals on what is likely at the Fed's
March meeting, and beyond.
    For Steven Abrahams, senior managing director at Amherst
Pierpont Securities, despite short-term volatility, Treasury
yields will likely continue to be on a downward path this year
as the market gets more clarity on the path of inflation and
monetary policy.
    Uncertainty around the U.S. debt ceiling, however, will
likely keep investors on their toes.
    "I think a showdown over the debt ceiling puts a floor on
how low volatility can go until the debt ceiling issue is
resolved, and that might not be until July, August or beyond,"
he said.
      January 23 Monday 9:56AM New York / 1456 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5525       4.6665    0.004
 Six-month bills               4.665        4.8408    0.013
 Two-year note                 100-18/256   4.2104    0.027
 Three-year note               100-6/256    3.8663    0.028
 Five-year note                101-52/256   3.6062    0.039
 Seven-year note               101-244/256  3.5544    0.032
 10-year note                  105-8/256    3.5135    0.030
 20-year bond                  102-208/256  3.7964    0.018
 30-year bond                  105-176/256  3.6838    0.028

                               Last (bps)   Net
 U.S. 2-year dollar swap        24.00        -1.00
 U.S. 3-year dollar swap        14.00         0.25
 U.S. 5-year dollar swap         4.00        -0.50
 U.S. 10-year dollar swap       -3.75         0.00
 U.S. 30-year dollar swap      -40.50        -0.25

 (Reporting by Davide Barbuscia; editing by Jonathan Oatis)

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.

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