U.S. yields slightly lower on market relief after Fed minutes



By Davide Barbuscia

NEW YORK, Aug 18 (Reuters) - U.S. Treasury yields ticked lower on Thursday on the back of Wednesday's release of minutes of the U.S. Federal Reserve's July meeting that some investors saw as confirming a less aggressive stance in the central bank's fight against inflation.

Fed officials said last month that the pace of future interest rate increases would depend on incoming data, with some saying rates would need to stay at a "sufficiently restrictive level" for "some time" to control inflation, according to the minutes of the July 26-27 session.

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.

U.S. government bond yields -- which move inversely to prices -- edged lower on Wednesday just after the minutes were published, with two-year note yields US2YT=RR down about 5 basis points, while U.S. stocks cut some of their losses.

"The market was relieved," said Eric Theoret, global macro strategist at Manulife Investment Management, who saw the minutes as suggesting a path of rate hikes consisting of a 50 basis points hike in September, and two further hikes of 25 basis points each for the rest of the year, bringing the Fed funds rate to 3.50%.

"To me the new glimmer is that they will probably be staying at 3.50% for longer and not cut rates quickly," he added.

On Thursday benchmark 10-year Treasury yields US10YT=RR were down slightly to 2.844% whilst two-year note yields were down by about seven basis points, when compared to Wednesday's close, to 3.218%.

Fed funds futures traders on Thursday were pricing in a 65.5% chance of a 50 basis points hike in September, whilst before the minutes were released on Wednesday bets were skewed toward a 75 basis-point hike. They expect rates to hit a peak of nearly 3.7% by March.

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.

Data on Thursday showed below-forecast and downwardly revised jobless claims - which confirmed there was no material slowdown in the labor market.

That pushed yields temporarily higher, although those price moves were reversed after San Francisco Federal Reserve Bank President Mary Daly said that either a half- or 75-basis-point interest-rate hike in September would be a "reasonable" way to get short-term borrowing costs to a little over 3% by year end, and a little higher than that in 2023.

August 18 Thursday 9:41AM New York / 1341 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.6

2.6534

0.012 Six-month bills US6MT=RR

3.0075

3.0961

-0.026 Two-year note US2YT=RR

99-151/256 3.2183

-0.077 Three-year note US3YT=RR

99-192/256 3.2133

-0.064 Five-year note US5YT=RR

98-232/256 2.9892

-0.060 Seven-year note US7YT=RR

98-24/256

2.9301

-0.058 10-year note US10YT=RR

99-48/256

2.844

-0.051 20-year bond US20YT=RR

100-132/256 3.3393

-0.039 30-year bond US30YT=RR

97-204/256 3.1135

-0.032

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

34.25

2.00

spread

U.S. 3-year dollar swap

11.75

0.50

spread

U.S. 5-year dollar swap

3.25

0.00

spread

U.S. 10-year dollar swap

4.75

0.00

spread

U.S. 30-year dollar swap

-32.25

-0.75

spread


Reporting by Davide Barbuscia; Editing by Alison Williams

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