TREASURIES-U.S. yields up as GDP, labor data point to economic resilience

BY Reuters | ECONOMIC | 01/26/23 03:29 PM EST
    (Adds details on auction, updates prices)
    By Davide Barbuscia
       NEW YORK, Jan 26 (Reuters) - U.S. Treasury yields rose
on Thursday after data showed resilience in the U.S. economy,
potentially strengthening the case for the Federal Reserve to
maintain its hawkish posture in coming months as it seeks to
cool inflation.
    GDP increased at a 2.9% annualized rate last quarter, the
Commerce Department said in its advance fourth-quarter GDP
growth estimate on Thursday. The economy grew at a 3.2% pace in
the third quarter. Economists polled by Reuters had forecast GDP
would rise at a 2.6% rate.
    A separate report from the Labor Department on Thursday
showed the labor market remained strong, with initial claims for
state unemployment benefits dropping 6,000 to a seasonally
adjusted 186,000 for the week ended Jan. 21, lower than the
192,000 reported for the previous week.
    Benchmark U.S. Treasury 10-year yields rose by
about 3 basis points to 3.491% on Thursday. Two-year yields
, which tend to more closely reflect monetary policy
expectations, went up by about 4 basis points to 4.178%.
    Before the data was released, yields were already up on the
back of euro zone bond yields, which rose on Thursday after
recent hawkish comments from European Central Bank officials.
    "This morning we started to see some data coming in a bit
above expectations, which is a good sign for growth, and that's
going to help decrease the downside move in Treasury yields that
had been developing in the last couple of weeks," said Matthew
Miskin, co-chief investment strategist at John Hancock
Investment Management.
    The U.S. central bank 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 gyrating
between the two.
    After a series of supersized rate hikes, the Fed is now
largely expected to deliver a smaller 25-basis-point hike next
week after indications of a slowdown in inflation.
    Signs of strength in the economy could be seen as supporting
a so-called "soft landing" scenario, one in which the Fed
manages to tame inflation without causing a recession. But
investors and analysts still point to the risk of
over-tightening due to the delayed effects of monetary policy.
    "We still expect the lagged impact of the surge in interest
rates to push the economy into a mild recession in the first
half of this year," Andrew Hunter, senior U.S. economist at
Capital Economics, said in a note.
    For Alexandra Wilson-Elizondo, head of multi-asset retail
investing at Goldman Sachs Asset Management, strong labor market
data on Thursday suggested an imminent dovish change of course
by the Fed remained unlikely.
    "It is difficult to see unemployment rising to the required
rate to moderate wage inflation at these levels of growth. We
believe above-potential growth, in combination with the low
level of jobless claims, should challenge the view of a policy
pivot in the near term," she said.
    The U.S. Treasury on Thursday auctioned $35 billion in
seven-year notes at a high yield of 3.517%, 2.2 basis points
below the expected rate at the bid deadline, reflecting strong
investor demand. The bid-to-cover ratio was strong at 2.69
times, above last year's average.
      January 26 Thursday 3:00PM New York / 2000 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5525       4.6689    -0.006
 Six-month bills               4.655        4.8328    0.008
 Two-year note                 99-230/256   4.1785    0.042
 Three-year note               99-250/256   3.883     0.042
 Five-year note                99-154/256   3.5878    0.044
 Seven-year note               102          3.5464    0.037
 10-year note                  105-56/256   3.491     0.029
 20-year bond                  103-92/256   3.7576    0.019
 30-year bond                  106-188/256  3.6281    0.004

                               Last (bps)   Net
 U.S. 2-year dollar swap        27.75        -1.50
 U.S. 3-year dollar swap        13.50        -0.50
 U.S. 5-year dollar swap         6.00         1.50
 U.S. 10-year dollar swap       -3.00         0.25
 U.S. 30-year dollar swap      -38.25         1.00

 (Reporting by Davide Barbuscia; Editing by Chizu Nomiyama, Paul
Simao and Jonathan Oatis)

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