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NEW YORK — Falling inflation expectations
briefly pushed yield spreads to their lowest levels in months
before rebounding on Monday as investors continued to digest the
Federal Reserve’s hawkish turn at its policy meeting last week.
Economic projections released by the Fed on Wednesday showed
that 11 of 18 policymakers expected at least two
quarter-percentage-point interest rate hikes by the end of 2023.
The prospect of those sooner-than-expected moves have pushed
short-term yields higher while keeping longer-duration yields in
check as market fears of out-of-control inflation subside.
In a sign that investors expect the U.S. economy to expand
over the long term, 30-year Treasury yields had their biggest
jump since Jan. 6, while the spread between five- and 30-year
Treasuries had its largest increase since March 24, 2020.
Earlier in the session, the yield curve spread between
five-year notes and 30-year bonds hit 107.80 basis points, its
lowest level since August 2020, before ticking back to 121.90.
The spread between two-year notes and 10-year Treasuries hit its
lowest level since February before rising slightly to 118.93
basis points.
“By bringing forward rate hikes, the Fed is providing a
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material headwind not only for any inflation that might not
prove transitory but also growth as well. Needless to say, such
a hawkish pivot is likely to remain topical for weeks to come –
a reality further reinforced by the lack of meaningful economic
data over the next several sessions,” said Ian Lyngen, head of
U.S. rates strategy at BMO Capital Markets.
Two-year yields were flat at 0.2563%, while
10-year yields edged higher to 1.4853%. The two-year
yield hit 0.284%, its highest level since April 2020, on Friday.
Bond yields rise as prices fall.
“It feels like the Fed’s modest moves last week basically
got them in line with where the street was already. The bond
markets seem to agree with that, as the yield on the U.S.
10-year ended the week below 1.5%,” said Arthur Hogan, chief
market strategist at National Securities.
Meanwhile, the Federal Reserve’s reverse repurchase window
on Monday took in a record $765.14 billion in cash, despite
technical adjustments made by the Fed last week on the
short-term interest rates it manages, in a sign there are few
investment options available in a low-yield environment.
The question of how and when the U.S. central bank will
start tapering its monetary support will likely hang over the
bond market until the central bank’s annual meeting at Jackson
Hole, Wyoming in late August.
St. Louis Fed President James Bullard said that the Fed’s
methodical rundown of its bond purchases after the last economic
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crisis will likely not serve as a guide to how it should proceed
this time given a more volatile inflation environment and a
booming economy.
Given the upcoming annual meeting at Jackson Hole, investors
will be highly focused on what Fed members say over the coming
week, said Ellis Phifer, managing director in fixed income
research for Raymond James.
Markets will be looking for “any change in attitude and
character” that could suggest changes in the Fed’s support of
the economy, he said.
Price Current Net
Yield % Change
(bps)
Three-month bills 0.04 0.0406 0.000
Six-month bills 0.0475 0.0482 -0.005
Two-year note 99-192/256 0.2563 -0.004
Three-year note 99-88/256 0.4719 -0.008
Five-year note 99-90/256 0.8844 -0.002
Seven-year note 100-24/256 1.2358 0.017
10-year note 101-80/256 1.4853 0.032
20-year bond 103-116/256 2.038 0.061
30-year bond 106 2.1036 0.076
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 6.75 0.25
spread
U.S. 3-year dollar swap 7.75 0.00
spread
U.S. 5-year dollar swap 5.00 0.00
spread
U.S. 10-year dollar swap -4.25 0.00
spread
U.S. 30-year dollar swap -33.00 -2.00
spread
(Reporting by David Randall; Editing by Andrea Ricci)
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