Yields little changed as Fed officials counter notion rates cuts beckon



By Herbert Lash

NEW YORK, Nov 28 (Reuters) - Treasury prices pared earlier gains on Monday after regional Federal Reserve 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

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 US2YT=RR 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 US10YT=RR

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, 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 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 US2US10=RR 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 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 US30YT=RR was up 0.1 basis points to 3.753%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 2.356%.

The 10-year TIPS breakeven rate US10YTIP=RR 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 US3MT=RR

4.2025

4.3041

-0.001 Six-month bills US6MT=RR

4.5275

4.6949

-0.008 Two-year note US2YT=RR

100-14/256 4.4711

-0.008 Three-year note US3YT=RR

100-186/256 4.2357

0.003 Five-year note US5YT=RR

99-232/256 3.8958

0.005 Seven-year note US7YT=RR

100-92/256 3.816

0.008 10-year note US10YT=RR

103-116/256 3.7071

0.005 20-year bond US20YT=RR

100-72/256 3.9793

0.001 30-year bond US30YT=RR

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

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