U.S. yields slide amid uncertainty about rate hike pace



By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 25 (Reuters) - U.S. Treasury yields fell on Monday in choppy trading, weighed down by market uncertainty about when the Federal Reserve would tighten monetary policy in the face of persistently high inflation.

The U.S. yield curve resumed steepening as investors continued to unwind curve flattening bets, which suggested a looming rate hike. The spread between U.S. 5-year notes and 30-year bonds widened to 91 basis points US5US30=TWEB on Monday, from 87.2 basis points late Friday.

"There is a lot of uncertainty over the Fed and its response to inflation and whether the market has priced in too aggressive of a tightening path," said Kim Rupert, managing director, fixed income, at Action Economics in San Francisco.

Fed funds futures showed a more than 60% chance of a 25 basis-point rate tightening in June next year, which some market participants found too aggressive since the Fed is supposed to end tapering of asset purchases in the same month. Futures traders also priced in two rate hikes before the end of 2022.

In morning U.S. trading, the benchmark U.S. 10-year yield fell nearly 3 basis points 1.6272 US10YT=RR . Last week, the 10-year yield hit 1.705%, the highest since mid-May.

The U.S. 5-year yield, which reflects Fed tightening, was last down 4 basis points at 1.1694% US5YT=RR . It has been trending upward in the last few weeks, touching its highest since February 2020 at 1.193% last week.

U.S. 30-year yields were also down less than a basis point at 2.0847% US30YT=RR .

U.S. yields have come off early highs, with market participants saying short-covering spurred the Treasury rally that caused rates to dip.

In other parts of the fixed income sector, the U.S. 5-year inflation breakeven rate, which reflects inflation expectations over the next five years rose to 2.93%, the highest since March 2005.

This week, the market is bracing for $183 billion in Treasury supply of 2,year, 5-year, and 10-year notes.

October 25 Monday 11:18AM New York / 1518 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.055

0.0558

-0.005 Six-month bills US6MT=RR

0.0625

0.0634

-0.003 Two-year note US2YT=RR

99-169/256 0.4271

-0.037 Three-year note US3YT=RR

99-170/256 0.7396

-0.045 Five-year note US5YT=RR

98-154/256 1.1678

-0.043 Seven-year note US7YT=RR

98-164/256 1.4569

-0.038 10-year note US10YT=RR

96-152/256 1.6272

-0.028 20-year bond US20YT=RR

95-12/256

2.0557

-0.015 30-year bond US30YT=RR

98-48/256

2.0819

-0.009

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

17.50

0.25

spread

U.S. 3-year dollar swap

16.25

0.50

spread

U.S. 5-year dollar swap

8.50

1.00

spread

U.S. 10-year dollar swap

2.00

1.00

spread

U.S. 30-year dollar swap

-21.25

0.25

spread


Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Chang

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