TREASURIES-Treasury selloff pauses, though rate cut expectations recede

BY Reuters | ECONOMIC | 04/17/24 11:53 AM EDT

(Updates as of 11:45 am ET)

By David Randall

NEW YORK, April 17 (Reuters) - U.S. Treasury yields dipped on Wednesday, slowing a weeklong selloff that had pushed benchmark 10-year Treasury yields to their highest levels since November.

The selloff has come as investors and the Federal Reserve reevaluate the need for interest rate cuts in the face of resilient economic data and signs of strength in the labor market. In an appearance on Tuesday, Fed Chair Jerome Powell was among several Fed speakers over the last few days who have noted that they would need to see drivers of inflation weaken before cutting rates.

"If higher inflation does persist, we can maintain the current level of restriction for as long as needed," Powell said.

Markets are now pricing in a total of 41 basis points in rate cuts by the end of the year, down from 48 at the start of the week and far below the more than 160 basis points in cuts expected in January. Futures markets now expect the first rate to come in September, according to CME's FedWatch Tool.

"The market is taking a breather after a decent selloff over the last week," said Sam Millette, director of fixed income for Commonwealth Financial Network. "Powell made it pretty clear that there's an openness at the Fed to keep rates higher for longer and remain data dependent," which could push the 10-year back toward its nearly two-decade high reached in October, he said.

The yield on 10-year Treasury notes was down 3.9 basis points at 4.618%. The yield on the 30-year Treasury bond was down 2.7 basis points at 4.730%.

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 -32.9 basis points, a slightly deeper inversion than on Tuesday.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.9 basis points at 4.945%.

Some investors may be attempting to lock in yields given the recent selloff and reassurances by the Fed this week that rate cuts are coming this year, noted Joe Kalish, chief global macro strategist at Ned Davis Research.

Powell "affirmed that they are not considering additional hikes, like some analysts were speculating. Instead, rate cuts have been delayed but not derailed," Kalish said, noting that 2-year Treasuries look attractive with yields at 5% or above.

(Reporting by David Randall Editing by Tomasz Janowski and Nick Zieminski)

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