NEW YORK, March 23 (Reuters) - A sharp sell-off in U.S. Treasuries eased on Wednesday as the market tried to get to grips with how the Federal Reserve might address high inflation without boosting interest rates at such a clip that it could spin the economy into recession.
Yields were lower across the curve, from two-year notes out to 30-year bonds, after the recent sell-off was further driven by a more hawkish tone from Fed Chair Jerome Powell on Monday.
Powell did not talk about policy on Wednesday when he spoke at a panel discussion on digital currencies organized by the Bank for International Settlements.
The yield on 10-year Treasury notes fell 2 basis points to 2.357%, while the gap between yields on two- and 10-year notes was at 21.9 basis points after collapsing to 13.5 on Tuesday.
The inversion of the gap, or when short-end rates rise above those at the long end of the yield curve, often indicates a recession is on the horizon.
To be sure, the Fed is well aware of what an inversion implies and likely will be more aggressive with the balance sheet than policy-makers have alluded, said John Luke Tyner, a fixed income analyst at Aptus Capital Advisors.
“Maybe that gets paired with more aggressive balance sheet reduction and less tightening, which could be a really good type of situation for the yield curve as well as the economy in general,” he said.
“He’s going to try to do whatever he can to keep the curve from inverting,” Tyner said of Powell. “You saw a little bit of that with some of his comments trying to get investors to look more at the 10-year three-month versus the 10-year two-year curve.”
The Treasury will auction $16 billion in 20-year notes with results announced at 1 p.m.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2 basis points at 2.134%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.538%.
The 10-year TIPS breakeven rate was last at 2.97%, indicating the market sees inflation averaging about 3.0% a year for the next decade.
The U.S. dollar five-year forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.589%.
Reporting by Herbert Lash; Editing by Kirsten Donovan
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