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TREASURIES-Yields lower as China data renews global economy concerns

 (Adds details, updates prices)
    By Davide Barbuscia
    NEW YORK, Aug 15 (Reuters) - U.S. Treasury yields fell
slightly on Monday as weak economic data from China renewed
concerns over the health of the global economy, while the market
continued to assess how much an inflation slowdown could affect
U.S. Federal Reserve monetary tightening policies.
    In a surprise move, China's central bank cut key lending
rates on Monday to revive demand as key economic indicators
slowed in July, with factory and retail activity impacted by
Beijing's zero-COVID policy and a property crisis.
    "China is the second biggest economy so if there's a
material slowdown there and China feels like it has to cut
rates, that says something about the strength of the global
economy," said Steven Abrahams, senior managing director at
Amherst Pierpont Securities.
    U.S. economic data on Monday signaled slowing activity as a
result of the Fed's efforts to curb demand as it fights
four-decade high inflation. U.S. single-family homebuilders'
confidence and New York state factory activity fell in August to
their lowest since near the start of the COVID pandemic.

    The U.S. central bank has raised its benchmark overnight
interest rate by 225 basis points since March and is expected to
raise its policy rate by another 50 or 75 basis points at its
next meeting on Sept. 20-21. The rapid tightening of financial
conditions, however, has fueled recessionary concerns.
    Benchmark 10-year Treasury yields were down at
2.791% on Monday from a 2.849% close last week. Two-year note
yields fell to 3.2% from 3.257%.
    Data last week showed U.S. producer prices unexpectedly fell
in July and the Consumer Price Index (CPI) for July was
unchanged on the month, but up at an annual rate of 8.5%.
    While this suggested a peak in inflation increases and
therefore a possible slowdown in the Fed's rate hikes, many in
the market remained skeptical and said more evidence of a
decline in price pressure was needed.
    "One encouraging CPI report does not constitute a new and
durable inflation trend," Glenmede investment strategists said
in a research note on Monday. "With core CPI still growing at a
near 6% clip on an annual basis, it's far from mission
accomplished."
    Fed funds futures traders are now pricing in a 59.5% chance
of a 50-basis-point hike in September and a 40.5% chance of a
75-basis-point increase. They expect the fed funds rate to hit
about 3.6% in March and decline after that.           
    "Everybody is still trying to figure out where they think
the Fed will go next year," said Abrahams.
    "Our feeling is that the market continues to underestimate
how high terminal Fed funds will go, so we're expecting the
yield curve to continue inverting pretty significantly," he
said, referring to the point where the federal funds rate will
peak.
    The closely watched yield curve between two- and 10-year
notes was at minus 41.1 basis points on Monday.
It reached minus 56 basis points on Wednesday last week, the
deepest inversion since 2000.
    An inversion in this part of the yield curve is viewed as a
reliable indicator that a recession will follow in 12-18 months.
      
    August 15 Monday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.5375       2.5884    0.025
 Six-month bills               2.9875       3.0741    0.007
 Two-year note                 99-159/256   3.2008    -0.056
 Three-year note               99-250/256   3.1332    -0.061
 Five-year note                99-64/256    2.9134    -0.064
 Seven-year note               98-128/256   2.8642    -0.062
 10-year note                  99-164/256   2.7914    -0.058
 20-year bond                  99-28/256    3.3116    -0.026
 30-year bond                  98-28/256    3.0972    -0.021
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        30.25         0.25    
 spread                                               
 U.S. 3-year dollar swap        11.50        -0.50    
 spread                                               
 U.S. 5-year dollar swap         3.25        -1.00    
 spread                                               
 U.S. 10-year dollar swap        3.50        -1.25    
 spread                                               
 U.S. 30-year dollar swap      -32.75        -1.50    
 spread (Reporting by Davide Barbuscia; editing by Ed Osmond and
Richard Chang)
  
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