U.S. yields climb despite 'not at all hawkish' Fed minutes



By Davide Barbuscia

NEW YORK, Aug 17 (Reuters) - U.S. Treasury yields climbed on Wednesday on lingering inflation concerns even as some investors saw minutes of the U.S. Federal Reserve's July meeting reaffirming a less aggressive stance in the central bank's fight against rising prices.

Fed officials said last month the pace of future interest rate increases would hinge on incoming data. The minutes did not indicate clear bias among officials for either a smaller rate increase of half a percentage point or a third consecutive 75 basis-point hike at the Sept. 20-21 meeting.

Data since the Fed's last policy meeting showed annual consumer inflation eased in July, which led many investors to price in a 50-basis-point rate increase next month. U.S. producer prices also fell last month as energy products cost less.

Benchmark 10-year yields US10YT=RR dipped about two basis points after the minutes were released while two-year note yields US2YT=RR fell by about five basis points from 3.335% to 3.285%. Still, they closed higher, at 2.894% and 3.293%, respectively.

"The minutes are not hawkish at all, and that's probably why we're seeing yields dip a little bit," said Edward Moya, senior market analyst at OANDA.

"But I think we are data dependent, and everyone's going focus on next week's Jackson Hole, which will probably just reinforce that narrative," he added, referring to the Kansas City Fed's Jackson Hole, Wyoming, symposium on Aug. 25-27.

Fed funds futures traders priced in a 59.5% chance of a 50 basis-point hike in September and a 40.5% chance of a 75 basis-point increase after the minutes were released. Earlier on Wednesday bets were more skewed toward a 75 basis-point hike.

For Thomas Hayes, chairman and managing member of New York-based Great Hill Capital, for rates to stop climbing investors will need more evidence that inflation has peaked.

"I think that the market wants to see some more confirmatory inflation data, which we'll see in early September with the CPI (Consumer Price Index) and the PPI (Producer Price Index)," he said.

The U.S. central bank has raised its benchmark overnight interest rate by 225 basis points since March to fight four decade-high inflation but its rapid tightening of financial conditions has led investors to weigh inflation concerns against recessionary fears, with markets oscillating between the two narratives.

U.S. retail sales were unchanged in July as declining gasoline prices weighed on receipts at service stations, but consumer spending appeared to be holding up, which could further assuage fears that the economy was already in recession.

"While overall retail sales were unchanged in July, the details were far more encouraging, with a price-related fall in gasoline sales freeing up households to increase spending on other goods," Michael Pearce, senior U.S. economist at Capital Economics, said in a note.

Treasury yields edged higher after the retail sales data.

Signals that inflation remains hot around the globe fueled concerns that central banks will likely continue their tightening.

New Zealand's central bank on Wednesday delivered its seventh straight interest rate hike and signaled a more hawkish tightening path over coming months, while British consumer price inflation jumped to 10.1% in July, its highest in just over 40 years.

August 17 Wednesday 3:00PM New York / 1900 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.5875

2.6407

-0.020 Six-month bills US6MT=RR

3.0325

3.1225

0.007 Two-year note US2YT=RR

99-115/256 3.2932

0.042 Three-year note US3YT=RR

99-146/256 3.2769

0.086 Five-year note US5YT=RR

98-166/256 3.046

0.086 Seven-year note US7YT=RR

97-190/256 2.987

0.082 10-year note US10YT=RR

98-192/256 2.8949

0.071 20-year bond US20YT=RR

98-28/256

3.3818

0.062 30-year bond US30YT=RR

97-32/256

3.1488

0.034

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

32.25

2.75

spread

U.S. 3-year dollar swap

11.50

0.50

spread

U.S. 5-year dollar swap

3.50

0.50

spread

U.S. 10-year dollar swap

4.75

0.75

spread

U.S. 30-year dollar swap

-31.50

0.75

spread


Reporting by Davide Barbuscia; Editing by Hugh Lawson and Richard Chang

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