TREASURIES-US yields rise on further consolidation ahead of massive supply next week

BY Reuters | ECONOMIC | 06/20/24 11:38 AM EDT

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U.S. housing starts fall, Philly Fed index declines

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U.S. yield curve reduced inversion

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U.S. rate futures price in between one to two cuts this year

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Focus on $21 billion U.S. five-year TIPS auction

(Recasts with market rise; adds analyst comment, Philly Fed data, more details about reports, bullets, byline; updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, June 20 (Reuters) - U.S. Treasury yields rose across the board on Thursday as risk appetite rose with equities and investors continued to rebalance their positions after last week's sharp decline on further evidence the world's largest economy is finally slowing down.

Investors are also looking ahead to next week's auction of about $183 billion in U.S. two-, five- and seven-year Treasury notes. Investors tend to sell Treasuries ahead of auctions to push up the yield before buying them back at a lower price, a practice called concession.

U.S. yields briefly came off their highs after Thursday's generally

soft economic reports

with the contraction in housing starts, a decline in the Philadelphia Federal Reserve business conditions index, and an increase in continuing jobless claims.

"Overall the market is trying to find its way," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"I wouldn't say that the fixed income market moved notably on the economic data this morning. It was just taking a breather more or less from the downward movement we have seen recently."

In late morning trading, the benchmark U.S. 10-year yield rose 6 basis points (bps) to 4.276%.

The U.S. 30-year yield gained 5.9 bps at 4.412% .

The two-year yield declined 5 bps to 4.743%.

U.S. yields also rose after the S&P 500 hit yet another record peak.

"The S&P hitting record highs could be a contributing factor to the rise in yields," said Barnes.

"At the margin, you had a little bit of a sell-off in the Treasury market and you probably could have had some repositioning as the equity market has not only been able to hold its gains, but was able to add to them this year."

The U.S. yield curve became less inverted. The inversion between U.S. two- and 10-year yields, which is typically a precursor to recession, was at minus 46.9 bps, compared with minus 49.3 bps late on Tuesday.

The curve is in a "bear steepener" phase, in which long-term rates are rising more steeply than shorter-dated ones. This often happens when the market thinks inflation could pick up, delaying the start of the Fed's easing cycle.

Following Thursday's economic data, fed funds futures slightly pared the chances of easing in September to 64%, from about 67% late on Tuesday, according to LSEG's calculations. The market is also pricing one to two rate cuts of 25 bps each this year.

Minneapolis Fed President Neel Kashkari said on Thursday it would

take a year or two

to get inflation back to 2% as wage growth might still be a bit too high, fueling concerns interest rates could remain elevated for some time.

Later on Thursday, the U.S. government will sell $21 billion of five-year Treasury Inflation-Protected Securities (TIPS). U.S. five-year TIPS yields have declined more than 20 basis points since hitting one-month peaks in late May. The yield was last up 3.6 bps at 2.096%. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Chang)

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.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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