U.S. yields climb as strong data supports more Fed rate hikes



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U.S. two-year/10-year yield curve deepens inversion

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U.S. 2-year, 10-year yields post largest daily gain in two weeks

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U.S. ISM-services index rises

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U.S. factory orders gain

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 5 (Reuters) - U.S. Treasury yields rose on Monday as strong data on the services and manufacturing sectors, coming on the heels of a solid non-farm payrolls report, reinforced expectations the Federal Reserve will continue to raise interest rates well into 2023.

The U.S. two-year/10-year yield curve US2US10=TWEB deepened its inversion from last Friday. The gap between the two notes' yields widened to as much as -81.20 basis points (bps), the most in two weeks, and was last at -78.5 bps.

The inversion of this curve typically precedes recession.

U.S. yields extended gains after Monday's slew of data showed continued expansion in the world's largest economy.

U.S. services industry activity unexpectedly picked up in November, with employment rebounding. The Institute for Supply Management (ISM) said on Monday its non-manufacturing PMI increased to 56.5 last month from 54.4 in October, which was the lowest reading since May 2020.

U.S. factory activity also showed a 1% gain for October, as did orders for durable goods.

"I think the Fed has more wood to chop here," said Gregory Faranello, head of U.S. rates at AmeriVet Securities in New York.

"The Fed took a sledgehammer to the market all year, but (Fed Chair Jerome) Powell said we're going to slow things down a little bit which makes sense and see how the economy evolves. But ISM services were well north of 50 so there is definitely conflicting data here," he added, saying that, in contrast, inflation has been on a downtrend of late.

U.S. yields initially jumped on Friday after nonfarm payrolls increased by 263,000 jobs last month, which was higher than expected, with the data for October also revised higher.

"The market is accepting that inflation is cooling and that's good news," said Stan Shipley, fixed income strategist, at Evercore ISI in New York.

"The problem is they're also looking at the labor market, (showing) a solid reading for the month of November, which means the Fed is going to go more because it wants the labor market to slow which raises the risk of recession," he added.

The rate futures market on Monday had priced in a peak fed funds rate of 4.95%, seen hitting at the July meeting. That was down from about 5.1% before Fed Chair Powell said last week that the U.S. central bank will likely slow the pace of interest rate hikes as soon as this month.

In afternoon trading, the yield on 10-year Treasury notes US10YT=RR was up 9.6 bps at 3.599%, posting its largest daily gain in roughly two weeks.

The yield on the 30-year Treasury bond US30YT=RR was up 5.8 bps at 3.618%.

On the shorter-end of the curve, the two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 10.9 bps at 4.390%. The two-year's yield rise was the largest daily gain since Nov. 18.

December 5 Monday 2:58 PM New York/1958 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 4.2075

4.3093

-0.011 Six-month bills US6MT=RR

4.5475

4.7161

0.034 Two-year note US2YT=RR

100-54/256 4.3874

0.107 Three-year note US3YT=RR

101-8/256

4.1233

0.132 Five-year note US5YT=RR

100-96/256 3.7916

0.126 Seven-year note US7YT=RR

100-248/256 3.7161

0.111 10-year note US10YT=RR

104-96/256 3.5974

0.094 20-year bond US20YT=RR

102-76/256 3.834

0.050 30-year bond US30YT=RR

106-248/256 3.6169

0.057

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

30.75

0.25

spread

U.S. 3-year dollar swap

10.25

-1.00

spread

U.S. 5-year dollar swap

2.00

-0.25

spread

U.S. 10-year dollar swap

-3.75

0.75

spread

U.S. 30-year dollar swap

-39.50

1.00

spread


Reporting by Gertrude Chavez-Dreyfuss; Editing by Kirsten Donovan and Angus MacSwan

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