Bonds News

TREASURIES-Long-term yields edge down, curve flattens on recession risk

 (Adds quotes, details; updates prices)
    By Davide Barbuscia
    NEW YORK, March 18 (Reuters) - Long-term U.S. Treasury
yields edged down on Friday as lack of a resolution of the
Russia-Ukraine conflict continued to weigh on markets, while
short-term yields kept rising on the back of a hawkish U.S.
central bank, further flattening the curve.
    Analysts and investors also pointed to some curve inversions
as further signals of a likely economic slowdown ahead, with
inflationary pressures related to the Ukraine crisis coming on
top of monetary-tightening plans by the U.S. central bank.
    The benchmark 10-year yield was down to 2.145%
from 2.167% and the 30-year yield was at 2.416% from
2.461% on Thursday, in a sign of risk aversion.
    Meanwhile, yields on two-year Treasuries, which
closely reflect monetary policy expectations, were up at 1.956%
from 1.915%, a day after the Federal Reserve hiked interest
rates for the first time since 2018.
    "The yield curve flattened sharply on the back of the
hawkish FOMC outcome, with a more aggressive than expected
near-term path for hikes and faster transition to neutral or
restrictive policy," said Jonathan Cohn, head of Rates Trading
Strategy at Credit Suisse. The FOMC is the Fed's policy-setting
    The Fed on Wednesday raised its key lending rate by a
quarter of a percentage point and forecast an aggressive path of
further increases to counter inflation. Policymakers also
trimmed economic growth projections for the year.
    Fed Chair Jerome Powell's "rhetoric made clear that the Fed
intends to prioritize price stability with a higher tolerance
for labor market weakness ... It's definitely a framework that
attempts to thread a difficult needle and one that justifies
heightened recession expectations, which is likely contributing
to curve flattening," said Cohn.
    The closely watched spread between yields on U.S. two-year
notes and 10-year ones was down to 18.7 basis
points on Friday from 25.4 on Thursday, reflecting increasing
concerns over the impact of tighter monetary policies on
economic prospects.
    An inversion of that part of the curve - where short-term
yields move higher than longer ones - has generally indicated
the risk of an upcoming recession.
    Other parts of the curve showed some inversions, including
the 7s/10s and the 20s/30s. The gap
between 10-year notes and 5-year notes was flat
at 0.1 basis points, but that curve also inverted intraday on
    The yield gap between three-year Treasuries and the 10-year
note, as well as between three- and five-year
notes, also went into negative territory.
    "All the signals are there for a meaningful slowdown in
economic growth for the balance of this year and going into
2023," said Steven Schweitzer, senior fixed income portfolio
manager with the Swarthmore Group. "The balance is definitely
shifting toward the higher probability of a recession."
    Meanwhile, as a fourth weekend of conflict approached,
Russia and Ukraine blamed each other for dragging out talks
aimed at seeking a resolution.
    "Treasuries are bull-flattening, moderate risk aversion
weighing in the overnight session, with fading hopes of a quick
breakthrough in Russia-Ukraine talks weighing on confidence,"
Citi strategists said in a note on Friday.
    Bull-flattening refers to an environment in which long-term
rates have been decreasing faster than short-term rates and
generally points to late-cycle economic strength leading to
tighter monetary policy and increased fears of a downturn.
    On Friday, two of the Fed's most hawkish policymakers said
the central bank needs to take more aggressive steps to combat
inflation, and a third - who just six months ago was the 
central bank's most dovish member - said he was open to that
      March 18 Friday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.4075       0.4136    0.018
 Six-month bills               0.79         0.8041    0.010
 Two-year note                 99-34/256    1.9569    0.016
 Three-year note               98-216/256   2.1521    0.006
 Five-year note                98-194/256   2.1411    -0.028
 Seven-year note               98-24/256    2.1722    -0.044
 10-year note                  97-152/256   2.1458    -0.046
 20-year bond                  97-160/256   2.5275    -0.067
 30-year bond                  96-120/256   2.4165    -0.068
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        24.75         0.75    
 U.S. 3-year dollar swap        14.00         0.50    
 U.S. 5-year dollar swap         9.25         0.25    
 U.S. 10-year dollar swap       10.50         0.25    
 U.S. 30-year dollar swap      -18.00         1.25    
 spread (Reporting by Davide Barbuscia; editing by Jonathan Oatis and
Tim Ahmann)