Yields little changed as Fed officials counter notion rates cuts beckon

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NEW YORK — Treasury prices pared

earlier gains on Monday after regional Federal Reserve

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presidents pushed back on the notion that the U.S. central bank

could soon cut interest rates to revive an economy that is not

robust as a tight labor market may suggest.

Minutes released last week from the Fed’s policy meeting in

early November gave succor to a market hoping the Fed might slow

early next year its fatest and most aggressive rate hiking

campaign in decades.

The Fed

needs to raise rates quite a bit further

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to control inflation and lower it toward the U.S. central

bank’s 2% goal, St. Louis Fed President James Bullard said.

New York Fed President John Williams declined to say

how fast and how long

he believes rates need to be raised in coming months, but

he reckoned a rate cut is possible in 2024 as inflation

pressures ease.

Yields on Treasury notes and bonds trimmed gains to

trade little changed.

The two-year Treasury yield, which often

moves in step with interest rate expectations,

slid 0.8 basis points

at

4.471

%, while the yield on benchmark 10-year notes

rose 0.5 basis points

to

3.707

%.

The Fed’s minutes last week and a soft inflation reading

on Nov. 10 that was taken from data for consumer prices have

been the driving force in the market, said Steven Ricchiuto,

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U.S. chief economist at Mizuho Securities USA LLC in New York.

The market had exuberantly latched onto the idea that

peak inflation had arrived and that the Fed was going to reverse

the upward course of interest rates, he said.

“It’s just a matter of time before they go from raising

rates to cutting rates,” Ricchiuto said tongue in cheek.

Fed Chairman Jerome Powell “has to reset expectations.

The market has jumped much further than it should have,” he

said. “Just because we’re slowing down the pace doesn’t mean

we’re anywhere near done.”

While an end to the Fed’s rate hikes is potentially positive

for markets, more consideration needs to be given to the

deteriorating economic outlook along with the possibility that

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inflation fears resurface, Mark Haefele, chief investment

officer at UBS Global Wealth Management, said in a note.

The recent rally in bond prices, which move inversely to

their yield, has put yields on the 10-year note on track in

November to post the biggest monthly decline since the beginning

of the pandemic in March 2020. Bigger monthly declines were

posted in January and February of that year, too.

The inversion of the yield curve measuring the gap between

two- and 10-year notes deepened further at -76.6

basis points. The inversion, when yields on short-dated debt are

higher than longer-dated debt, indicates a looming recession.

When the yield on the two-year Treasury equals or exceeds

the 10-year’s yield, both tend to be close to their cyclical

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peaks, Edward Yardeni, president and chief investment strategist

at Yardeni Research Inc, said in a note to clients.

The yield on the 30-year Treasury bond was up

0.1 basis points to 3.753%.

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

Inflation-Protected Securities (TIPS) was last at

2.356%.

The 10-year TIPS breakeven rate was last at

2.278%, indicating the market sees inflation averaging about

2.3% a year for the next decade.

There are no scheduled Treasury auctions this week of

government debt with maturities higher than half a year.

Nov. 28 Monday 2:53 p.m. New York / 1953 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.2025 4.3041 -0.001

Six-month bills 4.5275 4.6949 -0.008

Two-year note 100-14/256 4.4711 -0.008

Three-year note 100-186/256 4.2357 0.003

Five-year note 99-232/256 3.8958 0.005

Seven-year note 100-92/256 3.816 0.008

10-year note 103-116/256 3.7071 0.005

20-year bond 100-72/256 3.9793 0.001

30-year bond 104-108/256 3.7529 0.001

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 31.50 ******

U.S. 3-year dollar swap spread 12.75 ******

U.S. 5-year dollar swap spread 5.25 -0.50

U.S. 10-year dollar swap spread -3.00 0.25

U.S. 30-year dollar swap spread -44.75 0.25

(Reporting by Herbert Lash;

Editing by Alison Williams and Chizu Nomiyama)