TREASURIES-U.S. yields up after inflation data as investors await Fed meeting

BY Reuters | ECONOMIC | 01/27/23 10:49 AM EST
    (Adds details, prices, quotes)
    By Davide Barbuscia
       NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields were
higher on Friday after inflation data in Japan surprised on the
upside and following the release of the Federal Reserve's
favored inflation measure, the Personal Consumption Expenditures
(PCE) index, which was in line with expectations.
    Government bond yields - which move inversely to prices -
have been rangebound over the past few days as investors await
clues on monetary policy from the Federal Reserve at its
interest rate-setting meeting next week.
        Price moves meanwhile have been mainly determined by
economic data which painted a mixed picture. Economic output
data on Thursday, as well as labor market figures, surprised on
the upside, showing strength in the U.S. economy despite the
swift rise in interest rates by the Fed last year, aimed at
curbing rampant inflation.

        On the other hand, data released from the Commerce
Department on Friday showed consumer spending, which accounts
for more than two-thirds of U.S. economic activity, dropped 0.2%
last month.

        On the inflation side, the so-called core PCE price
index rose 4.4% on a year-on-year basis in December after
increasing 4.7% in November. The Fed tracks the PCE price
indexes for monetary policy, and other inflation measures have
also slowed down significantly.
    "The core PCE came in line with expectations and there was
no downside beat that we've become accustomed to with recent
(inflation) prints," said Thomas Hayes, chairman and managing
member of New York-based Great Hill Capital.
        For Paul Ashworth, chief North America economist at
Capital Economics, the slump in spending showed that the U.S.
economy was on the verge of a recession.

        "With higher interest rates evidently weighing heavily
on demand now, we expect core inflation to continue moderating
this year, which will eventually persuade the Fed to begin
cutting interest rates late this year," he said in a note.

        Traders of futures tied to the Fed's policy rate kept
bets on Friday that the U.S. central bank will raise interest
rates just once more beyond next week's widely expected
quarter-point hike before stopping. They were pricing for the
benchmark rate to peak at about 4.91% in June, before declining
to 4.46% in December.

        Yields declined marginally immediately after the PCE
data but they pared losses and were higher on the day after data
overnight showed core consumer prices in Tokyo, a leading
indicator of nationwide trends, rose 4.3% in January from a year
earlier, marking
    the fastest annual gain in nearly 42 years

        Benchmark 10-year yields were up about five
basis points at 3.54%, while two-year yields were up
about four basis points to 4.219%.

        Key parts of the yield curve remained deeply inverted,
reflecting concerns about an imminent recession. The two-year,
10-year curve was last at minus 68.1 basis
points, while the spread between three-month and 10-year yields
 was at minus 114 basis points.

  January 27 Friday 10:17AM New York / 1517 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5625       4.6774    0.008
 Six-month bills               4.6675       4.8441    0.011
 Two-year note                 99-210/256   4.2196    0.042
 Three-year note               99-218/256   3.9281    0.045
 Five-year note                99-90/256    3.643     0.055
 Seven-year note               99-100/256   3.5993    0.056
 10-year note                  104-204/256  3.5404    0.049
 20-year bond                  102-224/256  3.7918    0.033
 30-year bond                  106-24/256   3.662     0.034

                               Last (bps)   Net
 U.S. 2-year dollar swap        27.75         0.00
 U.S. 3-year dollar swap        14.00         0.50
 U.S. 5-year dollar swap         6.25         0.25
 U.S. 10-year dollar swap       -2.75         0.25
 U.S. 30-year dollar swap      -37.50         0.75

 (Reporting by Davide Barbuscia; Editing by Raissa Kasolowsky
and Andrea Ricci)

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