TREASURIES-US yields dip after data, Fed comments

BY Reuters | ECONOMIC | 11/28/23 11:25 AM EST

By Chuck Mikolajczak

NEW YORK, Nov 28 (Reuters) - U.S. 10-year Treasury yields declined on Tuesday, near two-month lows after data on the housing market and consumer, along with comments from Federal Reserve officials.

The S&P CoreLogic Case-Shiller national home price index posted a 3.9% increase in September on an annual basis, below the 4.0% estimate but stronger than the 2.5% rise in August, suggesting the housing market may be picking up steam.

A separate report from the Conference Board showed its consumer confidence index climbed to 101.0 in November, below the expected 102.0 but above the downwardly revised 99.1 in the prior month.

Despite a climb last week, the 10-year yield is on track for its biggest monthly decline since August 2019, as investors largely believe the Federal Reserve is done with its interest rate hike cycle and attempts to price in when the central bank will instead cut rates.

The sharp drop has pushed the 10-year yield near its lowest levels since late September.

"The market does a good job of getting itself excited for rate cuts and then overly pessimistic on rate cuts and then overly pessimistic on more hikes and we kind of swing the pendulum from one extreme to the other," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.

"We're at the bottom end of this recent range trade and I think the market is has gotten a little bit ahead of itself in expecting the Fed to cut so aggressively absent a sudden downward change in the economic data."

Softening economic data, including a reading on inflation two weeks ago, has fueled expectations the Fed will hold rates at their current level, while pricing in a slightly greater than 50% chance of a rate cut of at least 25 basis points in May, according to CME's FedWatch Tool.

The yield on the benchmark U.S. 10-year Treasury note on Tuesday fell 2 basis points to 4.369%.

U.S. Federal Reserve Governor Christopher Waller said on Tuesday he is "increasingly confident" the current setting of the central bank's benchmark interest rate will prove adequate to lower inflation to the Fed's 2% target.

In addition, Chicago Federal Reserve Bank President Austan Goolsbee said he believes that overall inflation is coming down at a pace not seen since the 1950s.

Recent comments from some other Fed officials have not ruled out the possibility more rate hikes could be needed should a change in economic data require it and on Tuesday, Fed Governor Michelle Bowman said the Fed will likely need to raise borrowing costs further in order to bring inflation back down to its 2% target over a reasonable period.

Fed Chair Jerome Powell is scheduled to speak on Friday.

The yield on the 30-year bond was unchanged at 4.536%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell after Waller said there are good economic arguments you could lower the policy rate if inflation continues falling for several more months and was last down, 5 basis points to 4.811%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 44.4 basis points from a negative 50.2 on Monday.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.196% after closing at 2.16% on November 27.

The 10-year TIPS breakeven rate was last at 2.223%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak Editing by Marguerita Choy)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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