U.S. yields pause march higher as investors mull Fedspeak

NEW YORK — U.S. Treasuries rallied on

Friday as new highs in yields this week met resistance from dip

buyers following comments from U.S. Federal Reserve officials

that temporarily calmed fears around the direction of inflation

and interest rates.

U.S. government bond yields, which rise when prices fall,

have been on the up this week as strong economic data in the

U.S. and inflation numbers in Europe supported concerns that the

fight against inflation is far from over and that central banks

will need to raise rates more than expected to cool the economy.

Benchmark 10-year Treasury yields as well as 30-year yields

went above 4% for the first time since November, while two-year

bond yields rose to levels not seen since 2007.

On Friday, however, bond bears met some resistance after Fed

officials on Thursday expressed doubts on whether recent

hotter-then-expected data was a “blip” or a sign that higher

interest rates were required to slow price rises.

The market was trying to read through comments of Fed

officials to gauge how the recent narrative of higher-for-longer

rates will impact the U.S. central bank’s economic projections,

which will be released at its next meeting later this month,

said Jake Jolly, senior investment strategist at BNY Mellon.

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Yields at 4% have “some psychological resonance as well …

at that level you’re going to see a bit of a bid, so you’re

getting that push and pull from investors coming into the market

being a little more attracted to extending duration,” he said.

Friday’s retrenchment in yields moderated after data showing

that the U.S. services sector grew at a steady clip in February,

with new orders and employment rising to more than one-year

highs, suggesting the economy continued to expand in the first

quarter.

Yields of benchmark 10-year Treasuries were last

seen at 4.002%, down about seven basis points from Thursday,

while two-year yields, which more closely reflect

monetary policy expectations, were last seen at 4.894%, down one

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basis point on the day.

The gap between the two- and 10-year yields,

a harbinger of a looming recession when shorter duration rates

are higher than longer-dated securities, remained deeply

inverted at -89.6 basis points.

Money market expectations that the Fed may go back to a 50

basis points increase of its policy rate at its next meeting

this month gained some traction earlier this week, although the

consensus remained largely around a 25 basis points hike.

Investors will look at data for U.S. unemployment on March

10 and the Consumer Price Index on March 14 to get a sense of

the Fed’s next steps as it seeks to slow inflation to its 2%

target. Fed Chair Jerome Powell’s testimony to Congress next

week could also give some indications on the monetary policy

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outlook.

March 3 Friday 10:19AM New York / 1519 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.74 4.8615 -0.008

Six-month bills 4.9275 5.1347 -0.007

Two-year note 99-127/256 4.8942 -0.010

Three-year note 98-72/256 4.6297 -0.013

Five-year note 98-180/256 4.2917 -0.031

Seven-year note 98-216/256 4.1926 -0.048

10-year note 95-232/256 4.0027 -0.070

20-year bond 96-80/256 4.1484 -0.087

30-year bond 94-208/256 3.9208 -0.100

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 33.50 -0.25

spread

U.S. 3-year dollar swap 19.25 -0.50

spread

U.S. 5-year dollar swap 8.25 0.00

spread

U.S. 10-year dollar swap 1.00 0.00

spread

U.S. 30-year dollar swap -39.00 0.50

spread

(Reporting by Davide Barbuscia;Editing by Elaine Hardcastle)