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
York.
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
at
3.667
%.
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
(bps)
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
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 23.75 -0.75
spread
U.S. 3-year dollar swap 13.50 -0.50
spread
U.S. 5-year dollar swap 3.50 -0.50
spread
U.S. 10-year dollar swap -4.00 0.25
spread
U.S. 30-year dollar swap -40.00 0.75
spread
(Reporting by Gertrude Chavez-Dreyfuss, editing by Deepa
Babington)
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