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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)
financialpost.com
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