Yields edge higher, Fed rate path in focus

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NEW YORK — U.S. Treasury yields edged

higher on Friday and held just above two-week lows reached on

the previous day as investors weighed the likelihood that the

Federal Reserve will spark an economic downturn as it

aggressively hikes interest rates in a bid to stem soaring

inflation.

Yields have dropped from more than decade highs reached

before last week’s Fed meeting, when the U.S. central bank hiked

rates by 75 basis points, the biggest increase since 1994, and

signaled that a similar move is possible in July.

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“It’s been a huge move lower really across the curve. …

It’s come down to some pricing out of central bank tightening,”

said Zachary Griffiths, an interest rate strategist at Wells

Fargo in Charlotte, North Carolina.

Fed funds futures traders have pared back expectations on

how high the Fed is likely to raise its benchmark rate as

concerns about an economic downturn increase. They are now

pricing for the rate to rise to 3.49% by March, down from

expectations last week that it would increase to around 4%. It

is currently 1.58%.

Griffiths says inflation is unlikely to have peaked,

however, which will likely keep the Fed on an aggressive rate

hike path and keep shorter-dated yields elevated.

The next major catalyst for the market will likely be the

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release of the Personal Consumption Expenditures (PCE) price

index next Thursday, which will be watched for further

confirmation that price pressures remain heated.

“The focus on economic data at this point is going to be

about as intense as it’s been in recent memory,” Griffiths said.

Fed Chairman Jerome Powell said on Thursday that the Fed’s

commitment to reining in 40-year-high inflation is

“unconditional” — but also comes with the risk of higher

unemployment.

Yields briefly dipped on Friday after data showed that

consumer sentiment fell to a record low in June.

Benchmark 10-year yields were last at 3.089%. They have

fallen from 3.498% on June 14, the highest since April 2011.

Two-year Treasury yields were at 3.027%, down from 3.456% on

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June 14, which was the highest since November 2007.

The closely watched yield curve between two-year and 10-year

notes was at 6 basis points, after inverting

early last week. An inversion in this part of the curve is seen

as a reliable indicator that a recession is likely in one to two

years.

June 24 Friday 10:07AM New York / 1407 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.66 1.6898 0.056

Six-month bills 2.42 2.4833 0.056

Two-year note 99-5/256 3.0272 0.015

Three-year note 99-88/256 3.108 -0.008

Five-year note 97-176/256 3.135 0.001

Seven-year note 97-130/256 3.1531 0.009

10-year note 98-48/256 3.089 0.019

20-year bond 96-228/256 3.4676 0.034

30-year bond 93-128/256 3.215 0.034

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 33.00 -3.75

spread

U.S. 3-year dollar swap 14.75 -1.00

spread

U.S. 5-year dollar swap 3.50 0.25

spread

U.S. 10-year dollar swap 7.50 0.75

spread

U.S. 30-year dollar swap -24.00 2.00

spread

(Reporting by Karen Brettell; editing by Jonathan Oatis)