TREASURIES-U.S. yields lower as growth concerns weigh on markets ahead of Fed

BY Reuters | ECONOMIC | 01/25/23 09:58 AM EST
       By Davide Barbuscia
       NEW YORK, Jan 25 (Reuters) - U.S. Treasury yields were
down in morning trade on Wednesday, reflecting concerns about an
economic slowdown ahead of the Federal Reserve's interest
rate-setting meeting next week.
    The Fed raised its benchmark overnight rate by 4.25
percentage points last year to fight decades-high inflation, but
the rapid tightening of monetary policy - the fastest since the
1980s - has led investors to weigh inflation concerns against
recessionary fears, with markets fluctuating between the two.
    After a series of supersized rate hikes last year, the U.S.
central bank is now largely expected to raise rates by a smaller
25 basis points next week after signs that inflation is cooling
off. The prospect of a slower tightening pace has recently
reinforced some expectations of a so-called soft landing - a
scenario in which inflation eases against a backdrop of
weakening but resilient economic growth.
    But fears of an upcoming economic contraction were affecting
markets on Wednesday, with a bleak revenue guidance from
Microsoft Corp (MSFT) on Tuesday weighing on sentiment for
growth stocks, and with investors focused on corporate earnings
reports to assess the impact of the Fed's hikes and gauge
whether recent enthusiasm for such stocks will be sustained.
    Meanwhile, inflation data from other countries such as
Australia, where price pressures rose to a 33-year peak of 7.8%
last quarter, signaled global central banks might need to keep
hiking interest rates for longer, dampening a recent wave of
optimism that aggressive monetary tightening was almost done.
    "It's kind of a tug-of-war between central banks, which may
not eventually be easing the way the markets are pricing, and
the weaker growth data," said Eric Theoret, global macro
strategist at Manulife Investment Management.
    Benchmark 10-year government bond yields were
down about 2 basis points to 3.441% on Wednesday and two-year
note yields - which tend to more closely reflect
monetary policy expectations - inched 1 point lower to 4.143%.
    A widely tracked part of the U.S. Treasury yield curve
measuring the gap between those two maturities
remained inverted at -70.5 basis points. The inversion of this
curve has predicted eight of the last nine recessions, analysts
have said.
    Later on Wednesday, the U.S. Treasury will auction $43
billion in five-year notes. In morning trade, five-year yields
 were at 3.552%, 3 basis points down from Tuesday.
      January 25 Wednesday 9:33AM New York / 1433 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5725       4.6902    -0.005
 Six-month bills               4.6675       4.8467    -0.010
 Two-year note                 99-247/256   4.1435    -0.010
 Three-year note               100-24/256   3.8409    -0.022
 Five-year note                101-114/256  3.5523    -0.030
 Seven-year note               102-84/256   3.4934    -0.032
 10-year note                  105-164/256  3.4416    -0.025
 20-year bond                  103-248/256  3.7148    -0.024
 30-year bond                  107-52/256   3.6035    -0.018

                               Last (bps)   Net
 U.S. 2-year dollar swap        30.00         5.25
 U.S. 3-year dollar swap        14.25         0.25
 U.S. 5-year dollar swap         4.25         0.50
 U.S. 10-year dollar swap       -3.25         1.25
 U.S. 30-year dollar swap      -39.00         1.75

 (Reporting by Davide Barbuscia; editing by Jonathan Oatis)

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