March 13, 2018 / 2:27 PM / 10 months ago

TREASURIES-Bond yields fall on slowing inflation, Tillerson ouster

 (Updates news, yields, chart)
    By Kate Duguid
    NEW YORK, March 13 (Reuters) - U.S. Treasury yields fell on
Tuesday morning in choppy trading, turned down by news that
President Donald Trump had ousted Secretary of State Rex
Tillerson, and by earlier news that February consumer price data
cooled, suggesting the anticipated pickup in inflation is likely
to be gradual. 
    The Labor Department reported its Consumer Price Index rose
0.2 percent last month, in line with expectations, but had
slowed compared with its 0.5 percent jump in January. January's
surge in inflation cemented investors' expectation of an
interest rate hike in March, and increased the possibility of a
fourth hike in 2018.
    Although February's data was in line with expectations, it
reduced the possibility of a fourth rate hike this year, with
Fed funds futures data showing investor expectations fell from
28 percent before the release to 25 percent following it.

    "It certainly presents some more difficult questions for the
central bank if they look to embark on a more aggressive hiking
cycle next week," said Aaron Kohli, interest rates strategist at
BMO Capital Markets in New York. 
    Speaking about the Fed, he continued: "How do they expect to
get inflation materially higher if they are already starting to
see some signs of spotty weakness?"
    In the 12 months through February, the CPI rose 2.2 percent,
up from 2.1 percent in January. Excluding the volatile food and
energy components, the CPI gained 0.2 percent, in line with
expectations, after accelerating 0.3 percent in January. 
    Also boosting bond prices was news that Trump on Tuesday
said he was replacing Secretary of State Tillerson with Central
Intelligence Agency Director Mike Pompeo.
    Yields fell on uncertainty over U.S. foreign policy going
forward, which will involve negotiations on trade and with North
Korea. U.S. Treasuries are safe-haven investments, which means
money flows to them during periods of market turmoil.
    Still, Treasuries retraced some of those losses by
midmorning trade. 
    "I don’t think Tillerson out and a replacement is a shock to
the market that lasts very much at all," said David Kotok,
chairman of money management firm Cumberland Advisors in
Sarasota, Florida. 
    Given the previous rapid changes in staff in the Trump
administration, "expectations of this kind of turnover are now
regularly accepted for the markets,” said Kotok.  
    The yield on the benchmark 10-year Treasury note
was 2.852 percent, down from 2.870 percent at Monday’s close.
The two-year note, which is particularly sensitive to
Fed interest rate policy, was down to 2.258 percent, below its
last close at 2.266 percent. The 30-year bond was
down to 3.122 percent, below its last close at 3.129 percent.  
    March 13 Tuesday 10:17AM New York / 1417 GMT
 US T BONDS JUN8               143-22/32    -0-1/32   
 10YR TNotes JUN8              120-52/256   0         
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.68         1.7107    0.029
 Six-month bills               1.8575       1.9012    0.026
 Two-year note                 99-248/256   2.2661    0.000
 Three-year note               99-216/256   2.4293    -0.005
 Five-year note                99-242/256   2.6367    0.002
 Seven-year note               99-188/256   2.7921    0.000
 10-year note                  98-248/256   2.87      0.000
 30-year bond                  97-104/256   3.1341    0.005
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        32.00         0.50    
 U.S. 3-year dollar swap        27.00         0.25    
 U.S. 5-year dollar swap        16.00         1.25    
 U.S. 10-year dollar swap        4.00         0.75    
 U.S. 30-year dollar swap      -15.00         0.50    

 (Reporting by Kate Duguid; editing by Nick Zieminski and
Jonathan Oatis)
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