Yields rise as risk sentiment improves, Fed in focus



By Karen Brettell

NEW YORK, May 23 (Reuters) - U.S. Treasury yields rose on Monday as risk sentiment improved ahead of a busy week that will include minutes from the Federal Reserve's latest meeting and new supply of short- and intermediate-dated debt.

Longer-dated yields have dropped from 3-1/2-year highs as sharp declines in stocks increased demand for the safe haven debt, and as investors worry that the Fed's aggressive plans to hike interest rates will tip the economy into a recession.

However, stock markets may be boosted this week by month-end demand for portfolio rebalancing, said Michael Lorizio, senior fixed income trader at Manulife Investment Management.

Wall Street rallied on Monday as gains from banks and recently battered megacap market leaders helped U.S. stocks rebound after their longest streak of weekly declines since the dotcom bust.

A sharp drop in inflation expectations as measured by inflation-linked bonds will also be in focus, as it may reflect growing confidence that the Fed's hawkish plans to reign in rising price pressures will ultimately prove effective.

"It is at least one part of the mosaic that the Fed looks at in trying to evaluate where inflation expectations are, and right now to see TIPS breakevens pull back, I think that may give them some ammunition to say that inflation expectations are somewhat well anchored, at least by that one measure," Lorizio said.

Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS) USBEI5Y=RR , a measure of expected average annual inflation for the next five years, were at 2.94% on Monday, after reaching a peak of 3.62% last month.

Minutes from the Fed's May meeting released on Wednesday are likely to show that the U.S. central bank remains committed to tightening policy at a rapid pace as it battles inflation that is rising at its fastest pace in four decades.

Fed funds futures traders are pricing in 50 basis point rate increases for each of the Fed's June and July meetings, and a strong possibility of the same in September. The Fed's benchmark rate is expected to rise to 3.06% by March, from 0.83% now. FEDWATCH USONFFE=

Atlanta Fed President Raphael Bostic said on Monday the quick response in financial markets to tighter monetary policy offers hope that other parts of the economy may adjust more quickly as well.

He added that it "might make sense" to pause further hikes after the June and July meetings for the U.S. central bank to assess the impact on inflation and the economy.

Fed Chair Jerome Powell will speak on Tuesday. FED/DIARY

Benchmark 10-year notes US10YT=RR rose seven basis points at 2.861%. Two-year note yields US2YT=RR gained four basis points to 2.627%.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened four basis points to 23 basis points.

The yield curve could flatten if short- and intermediate-dated notes come under pressure as the Treasury Department sells $137 billion of the debt this week. This will include $47 billion in two-year notes on Tuesday, $48 billion in five-year notes on Wednesday and $42 billion in seven-year notes on Thursday.

May 23 Monday 3:01PM New York / 1901 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 1.0125

1.0291

-0.005 Six-month bills US6MT=RR

1.4825

1.5141

0.038 Two-year note US2YT=RR

99-195/256 2.6266

0.044 Three-year note US3YT=RR

99-224/256 2.7939

0.063 Five-year note US5YT=RR

99-106/256 2.878

0.072 Seven-year note US7YT=RR

99-218/256 2.8986

0.077 10-year note US10YT=RR

100-32/256 2.8605

0.074 20-year bond US20YT=RR

99-212/256 3.2617

0.082 30-year bond US30YT=RR

96-48/256

3.0705

0.074

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

28.50

-0.25

spread

U.S. 3-year dollar swap

13.00

-0.50

spread

U.S. 5-year dollar swap

1.75

-0.75

spread

U.S. 10-year dollar swap

5.00

-0.50

spread

U.S. 30-year dollar swap

-27.50

0.00

spread


Reporting by Karen Brettell; Editing by Will Dunham and Richard Chang

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