* U.S. 5/30 yield curve steepens, unwinding flattening bets
* Fed funds futures show 60% chance of hike in June
* U.S. 5-year breakeven rate hits highest since January 2004
(Adds analyst comments, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 25 (Reuters) - U.S. Treasury yields slipped on
Monday in choppy trading, weighed down by market uncertainty
about when the Federal Reserve would tighten monetary policy in
the face of persistently high inflation.
The U.S. yield curve resumed steepening as investors
continued to unwind curve flattening bets, which suggested a
looming rate hike by the Fed. The spread between U.S. 5-year
notes and 30-year bonds widened to 91.4 basis points
on Monday, from 87.2 basis points late Friday.
Fed funds futures on Monday showed a more than 60% chance of
a 25 basis-point rate tightening in June next year, fully
pricing that scenario in September. Futures traders also priced
in two rate hikes before the end of 2022.
"Fully pricing a rate hike in September is too aggressive
for me since that would be just three months after tapering,"
said Gennadiy Goldberg, senior rates strategist at TD
Securities.
The Fed had said it wants to reduce asset purchases next
month and end in June.
"We still look at the first rate hike well into 2023. Of
course, that all depends on the economic outlook and our
economic outlook is moderation in growth and inflation over the
next 12 months. That doesn't require the Fed to effectively
hike rates," Goldberg added.
Fed Chair Jerome Powell on Friday said while he thinks it is
time to withdraw stimulus from the market, the Fed can be
patient with raising rates and allow the labor market to heal.
.
In afternoon U.S. trading, the benchmark U.S. 10-year yield
fell nearly two basis points to 1.6369%. Last week,
the 10-year yield hit 1.705%, the highest since mid-May.
The U.S. 5-year yield, which reflects Fed tightening, was
last down 3.3 basis points at 1.1777%. It has been
trending upward in the last few weeks, touching its highest
since February 2020 at 1.193% last week.
U.S. 30-year yields, on the other hand, were slightly higher
at 2.0919%.
U.S. yields have come off early highs, with market
participants saying short-covering spurred the Treasury rally
that caused rates to dip.
In other parts of the fixed income sector, the U.S. 5-year
inflation breakeven rate, which reflects inflation expectations
over the next five years, rose to 2.954%, the highest since at
least January 2004.
"To truly fight inflation, the Fed will need to increase its
policy rates," said Lon Erickson, portfolio manager at Thornburg
Investment Management in Sante Fe, New Mexico.
"Despite consistent Fed rhetoric around policy rate liftoff
well after tapering, when the economy reaches full employment,
we've started to see the market price in earlier policy rate
moves, perhaps losing confidence in the 'transitory' nature of
inflation," Erickson added.
This week, the market is bracing for $183 billion in
Treasury supply of 2-year, 5-year, and 10-year notes.
October 25 Monday 3:33PM New York / 1933 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.055 0.0558 -0.005
Six-month bills 0.0625 0.0634 -0.003
Two-year note 99-162/256 0.4414 -0.023
Three-year note 99-160/256 0.7529 -0.032
Five-year note 98-142/256 1.1777 -0.033
Seven-year note 98-144/256 1.4689 -0.026
10-year note 96-126/256 1.6387 -0.016
20-year bond 94-220/256 2.0676 -0.003
30-year bond 97-248/256 2.0919 0.001
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 17.25 0.00
spread
U.S. 3-year dollar swap 16.00 0.25
spread
U.S. 5-year dollar swap 8.75 1.25
spread
U.S. 10-year dollar swap 2.75 1.75
spread
U.S. 30-year dollar swap -20.25 1.25
spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard
Chang and Will Dunham)
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