Bonds News

TREASURIES-Yields off highs, curve rebounds from earlier flattening

 (Updates prices, adds comments, changes dateline previously
    By Karen Brettell
    NEW YORK, March 17 (Reuters) - Yields held just below
three-year highs on Thursday and the yield curve rebounded,
after earlier reaching its flattest level in more than two
years, a day after the Federal Reserve signaled it would hike
rates more aggressively than expected to tame soaring inflation.
    Safe-haven demand boosted bond purchases earlier on Thursday
after the Kremlin said that there was no deal to end its war
with Ukraine, though talks are ongoing.
    Investors also evaluated how the Fed's hawkish plans to
raise rates will impact growth. It raised rates by 25 basis
points on Wednesday, its first hike in more than three years.
    The market is pricing in “volatility, broadly speaking on
the geopolitical front as well as digesting the very hawkish Fed
sentiment,” said Subadra Rajappa, head of U.S. rates strategy at
Societe Generale in New York. “A lot had gotten priced into
global bonds and you’re starting to see a bit of a respite in
the selloff across the globe.”
    The yield curve steepened, reversing an earlier flattening
as investors priced in a faster pace of rate hikes and a higher
terminal rate, the neutral interest rate seen as consistent with
full employment and stable prices.
    Most Fed policymakers now see the federal funds rate rising
to a range between 1.75% and 2% by the end of 2022, the
equivalent of a quarter-percentage-point rate increase at each
of the Fed's six remaining policy meetings this year. They
project it will climb to 2.8% next year - above the 2.4% level
that officials now feel would work to slow the economy.

    Investors are concerned that aggressive tightening will dent
growth and potentially tip the economy into recession.
    “The market still doesn’t really truly believe that a sharp
path of rate hikes is not going to lead to a meaningful slowdown
in growth, so the curve continues to retain its flattening
bias,” Rajappa said.
    Fed policymakers marked down their gross domestic product
growth estimate for 2022 to 2.8%, from the 4% projected in
December, as they began to analyze the new risks facing the
global economy.
    Two-year note yields and 10-year yields
 were last at 1.936% and 2.174%, respectively, after
reaching 2.002% and 2.246% on Wednesday, both the highest since
May 2019.
    The yield curve between two-year and 10-year notes
 flattened to 19 basis points, the smallest yield
gap since March 2020, before rebounding back to 24 basis points.
    An inversion of the two-year, 10-year part of the curve is
viewed as a reliable signal that a recession is likely to follow
in the next few years.
    Jim Reid, a strategist at Deutsche Bank, noted that on
average it took around three years from the first Fed hike for
the economy to tip into recession though all but one of those
recessions occurred within 37 months when the 2s10s curve
inverted before the hiking cycle ended.
    Analysts say that the U.S. central bank could use roll-offs
from its massive $8.9 trillion bond holdings to help re-steepen
the yield curve if it gets too flat, or inverts.
    The Fed said on Wednesday it expects to begin reducing its
balance sheet "at a coming meeting." Powell told reporters that
policymakers had made "excellent progress on that front and
could finalize details at their next policy meeting in May.

    The five-year notes and 30-year bond curve
also shrank to 24 basis points on Thursday, the smallest yield
differential since September 2018, and was last at 31 basis
    The three-year, 10-year and five-year, 10-year yield curves
also moved back into positive territory, after earlier
    Some analysts also see the possibility that the Fed could
hike rates by 50 basis points at its May of June meetings if
inflation does not show any signs of abating. Fed funds futures
traders are fully pricing in a rate hike of at least 25 basis
points in May and a 45% chance of a 50-basis point increase.

      March 17 Thursday 10:03 a.m. New York / 1403 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.395        0.4009    -0.058
 Six-month bills               0.8125       0.8272    -0.033
 Two-year note                 99-43/256    1.9364    -0.033
 Three-year note               98-232/256   2.1292    -0.033
 Five-year note                98-180/256   2.1525    -0.044
 Seven-year note               97-240/256   2.1965    -0.030
 10-year note                  97-88/256    2.1742    -0.013
 20-year bond                  96-236/256   2.5734    0.009
 30-year bond                  95-120/256   2.465     0.007
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        23.25         0.75    
 U.S. 3-year dollar swap        13.50         0.00    
 U.S. 5-year dollar swap         9.00        -0.25    
 U.S. 10-year dollar swap       10.50         0.25    
 U.S. 30-year dollar swap      -19.75         0.50    
 spread (Reporting by Karen Brettell;
Additional reporting by Saikat Chatterjee in London; Editing by
Lisa Shumaker)