U.S. yields fall as spending slowdown bolsters hopes of Fed policy easing

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NEW YORK — Treasury yields slid

further on Thursday after data showed U.S. consumer and business

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spending slowed in the third quarter, pointing to a possible

peak in inflation that could allow the Federal Reserve to ease

its aggressive hiking of interest rates.

The yield on the benchmark 10-year Treasury note

slid below the 4% threshold as investors hoped the third-quarter

GDP report would lead the Fed to indicate an easing of its rate

hikes, as soon as December, when policymakers meet next week.

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Growth in consumer spending slowed to a 1.4% rate from the

second quarter’s 2.0% pace, the Commerce Department said. A

separate report showed new orders for non-defense capital goods

excluding aircraft, seen as a proxy for business spending,

unexpectedly fell in September.

A key indicator of price pressures, the GDP deflator,

came in at 4.1% versus the second quarter’s 9.1% reading, well

below expectations of 5.3%, according to a Reuters poll of

economists.

“This conforms with the broader peak inflation narrative,

and that’s a good portion of what’s driving the bid for

Treasuries at the moment,” said Ian Lyngen, head of U.S. rates

strategy at BMO Capital Markets in New York.

Fed funds futures priced in an 88.5% probability that the

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Fed will raise rates by 75 basis points when policymakers meet

Nov. 1-2, down from an 89.3% chance on Wednesday, according to

CME Group’s FedWatch tool. Expectations for a 50-basis-point

hike in December rose.

While Treasury yields slid and the outlook for the next rate

hike eased a bit, the lower end of the yield curve showed an

increased likelihood of a recession as it inverted further.

The negative yield spread on three-month bills and 10-year

Treasury notes increased to -8.2 basis points

after it closed inverted on Wednesday, the first time it has

indicated a recession since March 2020, according to Tradeweb.

The real interest rate, which is adjusted for inflation, has

fallen sharply in the past week on expectations the Fed will

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soon downshift its pace of tightening, said Joseph LaVorgna,

chief U.S. economist at SMBC Nikko Securities in New York.

But at about 1.5% the real rate is close to a 13-year

high and is restrictive enough to brake economic activity, he

said, adding that to avoid a “hard landing,” in which a

recession is triggered, the Fed would need to quickly pivot and

benefit from a few strokes of luck.

The Treasury sold $35 billion in seven-year notes

at a high yield of 4.027% in an auction on Thursday

that was mediocre at best, Lou Brien, market strategist at DRW

Trading, said in a note.

The 10-year yield was last down 5.5 basis points

to 3.960%, while 30-year bonds fell 6 basis points

to 4.104%.

The two-year U.S. Treasury yield, which typically

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moves in step with interest rate expectations, fell 7.8 basis

points at 4.340%.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.602%.

The 10-year TIPS breakeven rate was last at

2.461%, indicating the market sees inflation averaging almost

2.5% a year for the next decade.

The U.S. dollar 5 years forward inflation-linked swap

, seen by some as a better gauge of inflation

expectations due to possible distortions caused by the Fed’s

quantitative easing, was last at 2.519%.

Oct. 27 Thursday 2:14 PM New York / 1814 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 3.945 4.0396 0.008

Six-month bills 4.2975 4.4534 -0.027

Two-year note 100-17/256 4.34 -0.078

Three-year note 99-224/256 4.2948 -0.099

Five-year note 100-22/256 4.1058 -0.085

Seven-year note 99-8/256 4.0364 -0.066

10-year note 90-64/256 3.9598 -0.055

20-year bond 87-92/256 4.3321 -0.058

30-year bond 81-28/256 4.1042 -0.060

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 34.00 -0.50

U.S. 3-year dollar swap spread 12.00 0.75

U.S. 5-year dollar swap spread 4.25 1.00

U.S. 10-year dollar swap spread 1.25 0.25

U.S. 30-year dollar swap spread -48.50 0.50

(Reporting by Herbert Lash; Editing by Will Dunham and Paul

Simao)