Friday, March 29

US yields gain after PCE data shows inflation picking up


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NEW YORK—

US Treasury yields rose on Friday on expectations the

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Federal Reserve will hike interest rates again in either June or

July after consumer spending figures showed annual inflation

rose slightly last month.

The yield on two-year notes, which typically

moves in step with interest rate expectations,

jumped 5.2 basis points

to

4.562

%, while a closely watched gap between two- and 10-year

notes widened further, indicating a recession looms.

Consumer spending rose 0.8% last month and March data

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was revised up, the Commerce Department said.

consumption expenditures (PCE) price index excluding food and

energy increased 4.7% year over year after gaining 4.6% the

prior month. PCE is a favorite inflation gauge for the Fed.

“The market is fully pricing in a hike in the next two

meetings, 13 basis points in June and 12 in July,” said Priya

Misra, head of global rates strategy at TD Securities in New

York.

“The reason it’s still split is this idea of ​​a skip,

that some Fed officials feel they want a little more time.

That’s why they might skip in June and hike in July,” she said.

Federal funds futures rose to reflect a 65.4%

probability that the Fed raises rates at the end of a two-day

policy meeting on June 14, a sharp rise from the settlement

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price of 36.4% on Wednesday, according to CME Group’s FedWatch

tool.

The Fed’s target rate is now projected to stay above 5%

until Dec.13, up from Nov. 1 before the day’s data.

“Everybody thought the Fed was done after the rate hike

earlier this month,” said Tom Simons, money market economist at

Jefferies & Co in New York.

“I don’t think there’s really enough in the data now to

say that they should even pause. It makes more sense from their

point of view to keep going and stop at a certain point.”

Fed Cleveland President

Loretta Mester

said on Friday that the latest round of inflation data was

disappointing, but even so, she was not yet ready to say what

The central bank should do at its next meeting.

The rise in rates was tempered by efforts on Friday

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between the White House and congressional Republicans to put the

final touches on a deal

to raise the US government’s $31.4 trillion debt ceiling

for two years.

The yield on the benchmark 10-year note

fell 0.70 bps

to

3.808

%, below that of the two-year note.

The inverted yield curve generally signals a recession

is not far off. The difference in yields was

-75.6

basis points.

An economy that has proven resilient so far to the most

aggressive Fed tightening in four decades also suggests

policymakers will hike rates again. The unemployment report for

May could be decisive, Misra said.

“You get a solid payrolls number, anything above

100,000, will mean a 25 basis point hike is almost a done deal.”

The yield on the 30-year Treasury bond

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fell 3.7 basis points

to

3.967

%.

The 10-year TIPS breakeven rate was last

at

2.255

%, indicating that the market sees inflation averaging about 2.3%

a year for the next decade.

US bond trading closed early at 2 pm because of the

Memorial Day holiday on Monday.

May 26 Friday 1:32 pm New York / 1732 GMT

Net

Price Current Yield % Change (bps)

Three-month bills -0.078

5.1575 5.2944

Six-month bills -0.011

5.195 5.4208

Two-year note 0.052

99-105/256 4.5619

Three-year note 0.050

98-78/256 4.2401

Five-year note 0.034

98-160/256 3.9306

Seven-year note 0.015

99-64/256 3.8734

10-year note-0.007

96-112/256 3.808

20-year bond -0.018

96-80/256 4.1484

30-year bond -0.037

94-8/256 3.9672

DOLLAR SWAP

SPREADS

Net

Last (bps) Change (bps)

US 2-year

dollar swap spread 19.00 -0.75

US 3-year

dollar swap spread 11.50 -0.50

TU.S. 5-year

dollar swap spread 9.25 -0.25

US 10-year

dollar swap spread 3.00 1.00

US 30-year

dollar swap spread -41.00 1.00

(Reporting by Herbert Lash; editing by Kirsten Donovan)

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