By Gertrude Chavez-Dreyfuss
NEW YORK, April 11 (Reuters) – U.S. Treasury yields crawled higher in mostly uneven trading on Tuesday, with no real conviction in the moves, as investors geared up for Wednesday’s highly anticipated inflation report that should determine the future path of interest rates.
U.S. yields have stayed higher ever since the nonfarm payrolls data for March showed surprising resilience amid the Federal Reserve’s multiple rate hikes, the round of layoffs in the tech sector, and the recent banking crisis.
Friday’s jobs report cemented expectations that the Fed will raise interest rates by 25 basis points at next month’s policy meeting.
“Everybody’s eyes are on CPI (consumer price index) tomorrow. There’s a lot of risk that CPI could print higher,” said Tom di Galoma, co-head of global rates trading at BTIG in New York.
“Even if CPI moderates a bit, the Fed is geared up to raise rates again in May. All the Fed governors have been on the same page for the most part. There is some evidence though that the economy is slowing down but for whatever reason, the Fed doesn’t see that.”
The CPI report could reinforce rate hike expectations, analysts said, even though Wall Street economists see inflation slowing down. Headline inflation for March is expected to rise 0.2%, from a gain of 0.4% in February, while that for the core is seen climbing 0.4%, according to a Reuters poll.
“The trend that has been in place recently suggests that we’re not going to see many minus signs in the (CPI) components,” said Tom Simons, U.S. economist at Jefferies in New York. “We are still going to see firm service inflation, with housing inflation firm as well.”
New York Fed President John Williams further added to the rate-hike chorus on Tuesday. He said the Fed raising its benchmark rate only once more and in a 25-bp increase is a useful starting point but the central bank’s policy path will depend on incoming data.
Chicago Fed President Austan Goolsbee, on the other hand, preached caution and patience about raising interest rates amid the recent banking stress. He said on Tuesday a pullback in bank lending would help quell inflation and leave less for monetary policy to do.
In afternoon trading, the yield on 10-year Treasury notes US10YT=RR was up 1.7 bps at 3.432%.
A widely tracked part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR remained inverted at -60.9 bps.
The inversion of this yield curve typically precedes recession. The curve has been inverted since July last year.
U.S. two-year yields US2YT=RR, which typically move in step with interest rate expectations, advanced 2.7 bps to 4.037%
Ahead of CPI, breakeven inflation rates across the board were higher on the day.
Tuesday’s auction of U.S. three-year notes, meanwhile, showed solid demand, with a high yield of 3.810%, in line with expectations at the bid deadline. The bid-to-cover ratio, a gauge of demand, was 2.59, lower than the 2.93 posted last month, but higher than the 2.54 average.
Price
Current Yield %
Net Change (bps)
Three-month bills US3MT=RR
4.89
5.0207
0.019
Six-month bills US6MT=RR
4.7775
4.9773
-0.006
Two-year note US2YT=RR
99-179/256
4.035
0.027
Three-year note US3YT=RR
102-72/256
3.7923
0.021
Five-year note US5YT=RR
100-100/256
3.5383
0.019
Seven-year note US7YT=RR
100-224/256
3.4823
0.012
10-year note US10YT=RR
100-148/256
3.4299
0.015
20-year bond US20YT=RR
101-196/256
3.7478
0.004
30-year bond US30YT=RR
100
3.6248
-0.002
DOLLAR SWAP SPREADS
Last (bps)
Net Change (bps)
U.S. 2-year dollar swap spread
32.25
-0.25
U.S. 3-year dollar swap spread
17.75
0.75
U.S. 5-year dollar swap spread
7.50
0.00
U.S. 10-year dollar swap spread
-0.25
-0.50
U.S. 30-year dollar swap spread
-42.25
-0.75
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Andrea Ricci)
((gertrude.chavez@thomsonreuters.com; 646-301-4124; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))
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