TREASURE – US yields fall as inflation fears harass investors

Band Herbert Lash

NEW YORK, June 29 (Reuters)US Treasury yields decreases for a second consecutive day on Wednesday as the market took a cool view ohF the ability of the Federal Reserve to contain inflation without plunging the economy into recession.

Fed Chief Jerome Powell said on Wednesday that there is a risk that the Fed’s interest rate hikes will slow the economy too much, but the biggest risk is persistent inflation that allows public expectations about prices skid upper.

“The biggest mistake would be not to restore price stability,” Powell told a European Central Bank conference in Sintra, Portugal.

Thursday’s data is expected to show the personal consumption expenditure price index remained more than triple the Fed’s inflation target of 2% in May.

World Bank chief economist Carmen Reinhart told Reuters in an interview that she was skeptical of the ability of the U.S. and global economies to dodge a recession, given soaring inflation, sharp increases in interest rates and slowing growth in China.

Stan Shipley, fixed income strategist at Evercore ISI, said markets will remain choppy as investors and traders read economic data for what they want to see.

“We’re getting slower economic data, some sectors seem to be in recession, other sectors seem to be in pretty good shape,” he said. “Ultimately the Fed is going to bring inflation down so that by September and October the inflation data will start to pick up,” he said.

The return on 10-year treasury bills US10YT=RR fell 10.5 basis points to 3.102%, while US2YT=RR the yield slipped 6.5 basis points to 3.059%.

The spread between two- and ten-year bond yields US2US10=RRa measure commonly used to indicate a potential recession when short-term yield curve rates are higher than long-term ones, flattened at 3.9 basis points.

Yields in the middle of the curve are already inverted, with yields on three-, five- and seven-year bonds higher than 10-year ones at 3.134%, 3.162% and 3.180%, respectively.

There is a risk that U.S. businesses and households will see price pressures persist for a long time, Cleveland Federal Reserve Chair Loretta Mester said Wednesday.

Mester told CNBC that if economic conditions remain the same, she will push for a 75 one basis point rate hike at the next Fed policy meeting on July 26-27.

The Fed raised its key overnight rate two weeks ago by 75 basis points – its biggest increase since 1994 – to a range of 1.50% to 1.75%, and signaled that its key rate would increase to 3.4% by the end of this year.

The yield of the 30-year Treasury bond US30YT=RR fell 9.4 basis points to 3.218%.

The five-year U.S. Treasury Inflation-Protected Securities (TIPS) break-even rate US5YTIP=RR was last at 2.641%.

The 10-year TIPS break-even rate US10YTIP=RR was last at 2.391%, indicating that the market expects inflation to average around 2.4% per year for the next decade.

The US dollar 5-year inflation-linked swap USIL5YF5Y=Rconsidered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, last stood at 2.429%.

June 29 Wednesday 2:46 p.m. New York / 1846 GMT

Price

Current yield %

Net change (bps)

Three-month bills US3MT=RR

1.735

1.7668

-0.013

Half-yearly invoices US6MT=RR

2.45

2.5152

-0.029

Two-year ticket US2YT=RR

99-227/256

3.0588

-0.065

Three-year ticket US3YT=RR

99-70/256

3.1337

-0.086

Five-year ticket US5YT=RR

100-104/256

3.1615

-0.102

Seven-year note US7YT=RR

100-112/256

3.1798

-0.104

10 year ticket US10YT=RR

98-20/256

3.1022

-0.105

20 year bond US20YT=RR

96-216/256

3.471

-0.100

30 year bond US30YT=RR

93-112/256

3.2185

-0.094

DOLLAR EXCHANGE GAP

Last (bps)

Net change (bps)

2-year US dollar swap spread

33.50

1.25

3-year US dollar swap spread

2:50 p.m.

-0.25

5-year US dollar swap spread

3.75

0.75

10-year US dollar swap spread

7.75

0.50

30-year US dollar swap spread

-23.75

1.00

(Reporting by Herbert Lash Editing by Peter Graff and Nick Zieminski)

(([email protected]; 1-646-223-6019; Reuters Mail: [email protected]))

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Robert D. Coleman