TREASURIES-U.S. yields inch lower as markets look to next week's Fed meeting

BY Reuters | ECONOMIC | 01/24/23 11:10 AM EST
       By Gertrude Chavez-Dreyfuss
       NEW YORK, Jan 24 (Reuters) - U.S. Treasury yields were
mostly lower in choppy trading on Tuesday, as investors looked
to next week's Federal Reserve policy meeting that is widely
expected to deliver a smaller 25 basis-point rate increase.
    U.S. yields were lifted earlier in the session, as 10-year
and two-year yields hit one-week highs, lifted by data showing
that a slowdown in the U.S. manufacturing and services sector
eased off this month. Yields were mostly lower overnight, with
prices higher, in line with the European bond market.
    Data showed U.S. business activity contracted for the
seventh consecutive month in January, but was nevertheless the
highest reading in three months. S&P Global's Flash U.S.
Composite Output Index rose to 46.6 in January - with readings
below 50 indicating contraction in activity - from a final
reading of 45.0 in December.
    The report should bolster expectations that the Fed is
likely to tighten rates again next week, but at a slower pace.
    "I'm expecting 25 basis points in February and then another
25 in March and then I just see the Fed going on hold pretty
much for the rest of the year," said Tom di Galoma, managing
director and co-head of global rates trading at BTIG in New
    He said he believes a U.S. recession is imminent.
    "All the indications, from the inversion of the yield curve
to the fall in money supply, are telling me that we're going to
have a recession and it's not going to be a light one," he said.
    "Whether it comes from the housing market or the business
sector, we're going to have a recession. Companies are
struggling and are laying people off and I think the
unemployment rate heads to 4.5 to 5%."
    In late morning trading, the yield on 10-year Treasury notes
 was down 1.5 bps at 3.508%.
        U.S. 30-year Treasury bond yields were
    down 2.3 basis points

    A widely-tracked part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year Treasury
notes, remained inverted at -72.8 basis points.
    The inversion of this curve has predicted eight of the last
nine recessions, analysts said.
    The two-year U.S. Treasury yield, which typically
moves in line with interest rate expectations, was down 0.6 bps
at 4.234%.
        Also later on Tuesday, the Treasury will auction $42
billion in U.S. two-year notes.

    In other parts of the Treasuries market, the U.S. breakeven
inflation rates were mostly higher on Tuesday.
     The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.242%, up around 2 bps. The five-year breakeven rate suggested
that investors expect inflation, as measured by the consumer
price index, to average around 2.242% over the next five years.
    The 10-year TIPS breakeven rate was last at
2.284%, up roughly 1.8 bps.
      January 24 Tuesday 10:42AM New York / 1542 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5875       4.7064    0.037
 Six-month bills               4.6875       4.868     0.005
 Two-year note                 100-9/256    4.2294    -0.011
 Three-year note               99-252/256   3.8803    -0.017
 Five-year note                101-52/256   3.606     -0.019
 Seven-year note               101-252/256  3.5492    -0.023
 10-year note                  105-48/256   3.495     -0.028
 20-year bond                  103-60/256   3.7665    -0.043
 30-year bond                  106-64/256   3.6538    -0.036

                               Last (bps)   Net
 U.S. 2-year dollar swap        23.75        -0.75
 U.S. 3-year dollar swap        13.50        -0.50
 U.S. 5-year dollar swap         3.50        -0.50
 U.S. 10-year dollar swap       -4.00         0.25
 U.S. 30-year dollar swap      -40.00         0.75

 (Reporting by Gertrude Chavez-Dreyfuss, editing by Deepa

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