TREASURIES-Yields rise as Fed meeting minutes show inflation fears

 (Recasts with Fed meeting minutes, adds analyst quotes, data,
updates prices)
    By Karen Brettell
    NEW YORK, July 6 (Reuters) - Benchmark U.S. Treasury yields
edged higher on Wednesday but had a relatively muted reaction
after minutes from the Federal Reserve's June meeting showed
that a deteriorating inflation situation prompted Fed officials
to rally around an outsized interest rate increase.
    Based on data released in the days prior to the session,
"participants concurred ... that the near-term inflation outlook
had deteriorated since the time of the May meeting," the minutes
stated, justifying the 0.75-percentage-point increase and a move
to "restrictive" monetary policy.
    The Fed made the hike, the largest in more than a quarter of
a century, following data that showed inflation rising more
quickly than expected in May.
    "People are concerned that inflationary expectations are
becoming entrenched," said David Petrosinelli, senior trader at
InspereX, adding that the Fed communication prepared the market
for the minutes.
    Yields soared in the run-up to the June 14-15 meeting as
investors prepared for an aggressive rate hike before dropping
sharply as markets adjusted for the prospect of an economic
downturn as a result of the Fed's monetary tightening.
    "The macro narrative has shifted from inflation to growth
and it's very topical that there's the risk of a recession in
the next 12 months," said Ian Lyngen, head of U.S. rates
strategy at BMO Capital Markets in New York.
    Traders increased expectations on how high the U.S. central
bank will raise its benchmark rate after the minutes, though
they remain lower than before the meeting as concerns about an
economic downturn increase.
    "That's concerns about inflation and concerns that we're
going to have a period of much slower growth and a more
aggressive Fed," Petrosinelli said.
    Fed funds futures traders are pricing for the Fed's
benchmark rate to peak at 3.40% in March, compared with pricing
Wednesday morning for a top of around 3.25% in February.
Expectations before the June meeting were that it would increase
to around 4% by May. It is currently 1.58%.

    The two-year, 10-year part of the Treasury yield curve
reached minus 7 basis points, after inverting on Tuesday for the
first time in three weeks, a move that is seen as a reliable
indicator that a recession will follow in one to two years.

    The two-year, five-year part of the curve also reached minus
5 basis points after inverting on Tuesday for the first time
since February 2020.
    Benchmark 10-year yields were last at 2.919% after earlier
dropping to 2.746%, the lowest since May 27. They have fallen
from 3.498% on June 14, the highest since April 2011.

    The 10-year yields have closed a gap from late May, when
yields began to spike. A drop below the 2.70% area, just below
May's low of 2.706%, could open the door to further declines to
the 2.50% area, Lyngen said.
    Two-year Treasury yields were at 2.583% and are down from
3.456% on June 14, which was the highest since November 2007.

    Inflation expectations gained ground after the minutes, with
breakeven rates on five-year Treasury Inflation-Protected
Securities (TIPS), a measure of expected annual inflation for
the next five years, last at 2.50%. They earlier fell to 2.49%,
the lowest since November 2021. < USBEI5Y=RR>
    The next major U.S. economic release will be Friday's jobs
report for June. Economists polled by Reuters expect employers
to have added 268,000 jobs during the month.
    Data on Wednesday showed that U.S. job openings fell less
than expected in May. The U.S. services industry also slowed
less than expected in June, though a measure of services
employment dropped to a two-year low, suggesting that demand for
labor could be ebbing.
      July 6 Wednesday 3:06PM New York / 1906 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.85         1.8845    -0.007
 Six-month bills               2.515        2.5828    0.026
 Two-year note                 100-13/256   2.9732    0.157
 Three-year note               99-174/256   2.9892    0.170
 Five-year note                101-86/256   2.9595    0.143
 Seven-year note               101-172/256  2.9829    0.124
 10-year note                  99-160/256   2.9188    0.108
 20-year bond                  97-168/256   3.4133    0.115
 30-year bond                  95-56/256    3.1223    0.089
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        26.00        -1.00    
 U.S. 3-year dollar swap         9.50        -0.75    
 U.S. 5-year dollar swap         3.00         0.00    
 U.S. 10-year dollar swap        7.75         0.25    
 U.S. 30-year dollar swap      -26.75        -2.25    
 spread (Reporting by Karen Brettell; Editing by Barbara Lewis and Will