U.S. yields drop as growth worries mount amid hawkish Fed



* U.S. yield curve flattens

* U.S. housing data comes in weaker than expected in April

* U.S. solid 20-year bond auction adds to Treasuries demand

By Gertrude Chavez-Dreyfuss

NEW YORK, May 18 (Reuters) - U.S. Treasury yields fell in choppy trading on Wednesday, tracking losses on Wall Street, after poor U.S. housing data added to growing slowdown concerns amid aggressive monetary tightening by the Federal Reserve.

That said, a steep path for U.S. interest rates remained the prevailing market consensus.

"We are seeing U.S. growth decelerate. The question is how much it will decelerate and will it actually start to persistently slow," said Bill Merz, head of fixed income at U.S. Bank Wealth Management in Minneapolis.

"That's a big if, and right now we're just seeing signs of softening data and of tighter financial conditions."

The Fed is trying to dampen demand so inflation comes down, and part of that works through expectations rather than the actual act of hiking rates, Merz said.

"Expectations are for such extreme rate hikes that current activity begins to slow. But we don't really know if we're at that point yet. We haven't seen enough evidence that expectations are starting to influence rate hikes at this point," he added.

A solid U.S. 20-year bond auction also added to bids on Treasuries.

U.S. benchmark 10-year yields hit one-week highs of 3.015% amid ultra-hawkish comments from Fed Chair Jerome Powell on Tuesday. But the yield fell below 3% after a soft U.S. housing starts number.

Powell said on Tuesday the Fed would push interest rates as high as needed to stem a surge in inflation that he said threatened the foundation of the economy.

"If that involves moving past broadly understood levels of 'neutral' we won't hesitate to do that," Powell said at a Wall Street Journal event, referring to the rate at which economic activity is neither stimulated nor constrained.

Interest rate futures have priced in a fed funds rate of 2.82% at the end of this year, compared with the current level of 0.83%. Futures have also factored in roughly 197 basis points of cumulative hikes in 2022. FEDWATCH

The fall in U.S. housing starts and building permits amid rising mortgage rates pressured Treasury yields as stocks fell.

U.S. housing starts slipped 0.2% to an annual rate of 1.724 million units last month, with the March data revised lower to a rate of 1.728 million units.

April's permits for future homebuilding also dropped 3.2%.

In afternoon trading, 10-year yields slid 7 basis points to 2.896% US10YT=RR , while the 30-year bond yield US30YT=RR fell 8 basis points to 3.08%.

On the front end of the curve, U.S. two-year yields, which are sensitive to Fed rate expectations, were down 2.6 basis points at 2.671% US2YT=RR .

The yield curve has further flattened, with the spread between U.S. two- and 10-year yields narrowing to 22 bps US2US10=TWEB .

Wednesday's U.S. 20-year auction was well received, stopping through a high yield of 3.290%, lower than the expected rate at the bid deadline. Still this was the highest yield on record since the maturity was reintroduced in May 2020.

Its bid-to-cover ratio, a measure of demand, of 2.5 was lower, however, than last month's auction.

May 18 Wednesday 3:01PM New York/1901 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 1.0225

1.0394

-0.031 Six-month bills US6MT=RR

1.5

1.5325

-0.015 Two-year note US2YT=RR

99-174/256 2.6694

-0.029 Three-year note US3YT=RR

99-190/256 2.8405

-0.041 Five-year note US5YT=RR

99-84/256

2.8965

-0.049 Seven-year note US7YT=RR

99-184/256 2.9199

-0.075 10-year note US10YT=RR

99-224/256 2.8895

-0.081 20-year bond US20YT=RR

86-244/256 3.2776

-0.093 30-year bond US30YT=RR

96-40/256

3.0721

-0.092

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

27.75

0.25

spread

U.S. 3-year dollar swap

13.50

1.25

spread

U.S. 5-year dollar swap

3.00

0.00

spread

U.S. 10-year dollar swap

5.75

-0.25

spread

U.S. 30-year dollar swap

-27.00

-1.00

spread


Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis

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