June 12, 2019 / 2:52 PM / 14 days ago

TREASURIES-U.S. yield curve steeper as soft inflation spurs rate cut bets

NEW YORK, June 12 (Reuters) - The U.S. Treasury yield curve steepened on Wednesday after soft inflation data pulled short-dated yields lower, indicating increased expectations that the Federal Reserve will cut interest rates.

Consumer prices barely rose in May, the Labor Department reported. There was, however, some evidence of inflation in rising rent and healthcare costs, which could buy the central bank some time before easing monetary policy.

“I don’t think this signals an inflation slump or anything. But, it’s still going to fuel expectations of ease,” said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets.

Fed policymakers will meet June 18-19 against the backdrop of rising trade tensions, slowing growth and a sharp step-down in hiring in May that has led financial markets to price in at least two interest rate cuts by the end of 2019.

The weak May jobs report, as well as dovish comments from Fed members, bolstered rate cut forecasts in the trading week through June 7. Those expectations eased on Tuesday after producer price index data suggested that current low levels of inflation may be temporary.

“We’ve run back up - not to the peak of easing expectations we saw a week ago - but much closer to it. With that easing expectation the curve steepens,” said Cloherty.

The two-year yield, which is a proxy for market expectations of rate cuts, was last 4.1 basis points lower at 1.877%. At the long end, the benchmark 10-year yield was 1.6 basis points lower at 2.124%. The spread between the two- and 10-year yields, the most common measure of the yield curve, rose to 24.5 basis points, from its close Tuesday at 21.3.

Expectations of a rate cut in July were slightly higher Wednesday from the day prior, last at 66.8%, according to CME Group’s FedWatch tool. Expectations of two cuts by July also rose slightly, from 12.4% Tuesday to 18.1% currently.

Investors are unlikely to make big moves ahead of the Fed’s meeting next week. Referring to the last Federal Open Market Committee statement which said policymakers would be “patient” about tightening monetary policy, Cloherty said: “If they remove “patient,” people will assume a rate cut is a done deal. If they keep it, it will leave some doubt.”

At the far end of the curve, the 30-year yield was up 0.8 basis point, last at 2.624%.

Later on Wednesday, the Treasury Department will auction off $24 billion in 10-year notes. (Reporting by Kate Duguid; Editing by Andrea Ricci)

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