(Adds details on Treasury auction, analyst, updates prices)
By Davide Barbuscia
NEW YORK, Jan 25 (Reuters) - U.S. Treasury yields inched
down 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.
"Tech earnings ... clearly painted a picture of a macro
slowdown. The January rally might be over if the rest of the
big-tech earnings and multi-nationals paints the same downbeat
picture," Edward Moya, senior market analyst at OANDA, said in a
note.
Meanwhile, overseas inflation data and central banks'
decisions sent mixed messages.
In Australia,
inflation rose to a 33-year peak
of 7.8% last quarter, signaling 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.
The Bank of Canada, on the other hand,
signaled it would likely halt further hikes
after lifting its key interest rate to 4.5% on Wednesday.
"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
declined marginally, about one basis point, to 3.458% on
Wednesday, and two-year note yields - slid to 4.137%.
A widely tracked part of the U.S. Treasury yield curve
measuring the gap between those two maturities
remained inverted at -68.1 basis points. The inversion of this
curve has predicted eight of the last nine recessions, analysts
have said.
The U.S. Treasury on Wednesday auctioned $43 billion in
five-year notes at a high-yield of 3.530%, 2.6 basis points
below the expected rate at the bid deadline, a sign of hefty
investor demand for the paper. The bid-to-cover ratio was strong
at 2.64 times, above last year's average of about 2.4 times.
January 25 Wednesday 3:00PM New York / 2000 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.5575 4.6747 -0.020
Six-month bills 4.6475 4.8254 -0.032
Two-year note 99-250/256 4.1373 -0.016
Three-year note 100-24/256 3.8409 -0.022
Five-year note 101-106/256 3.5592 -0.023
Seven-year note 102-64/256 3.506 -0.019
10-year note 105-128/256 3.4581 -0.009
20-year bond 103-168/256 3.7367 -0.002
30-year bond 106-220/256 3.6216 0.001
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 29.25 4.50
spread
U.S. 3-year dollar swap 14.00 0.00
spread
U.S. 5-year dollar swap 4.50 0.75
spread
U.S. 10-year dollar swap -3.25 1.25
spread
U.S. 30-year dollar swap -39.25 1.50
spread
(Reporting by Davide Barbuscia; editing by Jonathan Oatis)
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