Yields dip, Wednesday’s inflation data in focus



By Karen Brettell

NEW YORK, Aug 8 (Reuters) - U.S. Treasury yields dipped on Monday as investors continued to digest an unexpectedly strong jobs report from Friday and before highly anticipated inflation data on Wednesday, which will be scrutinized for how aggressively the Federal Reserve is likely to continue interest rates hikes.

Yields have risen off four-month lows reached last week as persistently high inflation, hawkish comments from Fed officials and a strong labor market dampen expectations that the U.S. central bank will take its foot off the pedal to dampen soaring price pressures.

Yields spiked on Friday after data showed U.S. job growth unexpectedly accelerated in July, with employers adding 528,000 in the month, while the level of employment rose above its pre-pandemic level.

“The jobs report was strong pretty much anyway you want to slice it, adding to the case for a 75 basis point hike in September,” said Benjamin Jeffery, an interest rate strategist at BMO Capital Markets in New York.

Consumer price inflation (CPI) data for July will be the next major economic release on Wednesday. It is expected to show that prices rose at an 8.7% annual pace during the month, according to the median estimate of economists polled by Reuters. USCPNY=ECI

“What is most important I think is Wednesday’s CPI data to determine how large (the Fed) will opt to go in September,” said Jeffery.

Fed funds futures traders are now pricing for a 69% chance of another 75 basis points rate increase in September, and for the fed funds rate to rise to 3.62% by March, from 2.33% now. FEDWATCH USONFFE=

Fixed income analysts at JPMorgan said that they now expect a 75 bps hike in September, following the strong jobs data.

"Friday’s numbers should mollify recession fears but amplify concerns that the Fed has a lot more work to do," analysts led by Alex Roever said in a report, adding that a rise in wages will increase inflation concerns.

Average hourly earnings gained 0.5% in July after rising 0.4% in June. That left the year-on-year increase in wages at 5.2%.

A New York Federal Reserve survey on Monday, meanwhile, showed that U.S. consumers' expectations for where inflation will be in a year and three years dropped sharply in July.

Benchmark 10-year note yields US10YT=RR fell to 2.763% on Monday, after getting as high as 2.869% on Friday, the highest since July 22. Two-year yields US2YT=RR were last 3.216%, after reaching 3.331% on Friday, the highest since June 16.

The yield curve between two-year and 10-year notes US2US10=TWEB was at minus 46 basis points, the deepest inversion since 2000.

Safe haven bonds also saw some demand on geopolitical concerns as China's military announced fresh drills on Monday in the seas and airspace around Taiwan, a self-governed island China claims as its own. The drills come a day after the scheduled end of its largest ever exercises to protest last week's visit to Taipei by U.S. House Speaker Nancy Pelosi.

The Treasury will sell $98 billion in new coupon-bearing supply this week, including $42 billion in three-year notes on Tuesday, $35 billion in 10-year notes on Wednesday and $21 billion in 30-year bonds on Thursday.

August 8 Monday 3:03PM New York / 1903 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.4825

2.532

0.002 Six-month bills US6MT=RR

2.9925

3.0794

0.015 Two-year note US2YT=RR

99-151/256 3.2157

-0.032 Three-year note US3YT=RR

99-150/256 3.1485

-0.045 Five-year note US5YT=RR

99-66/256

2.9112

-0.063 Seven-year note US7YT=RR

98-148/256 2.8512

-0.068 10-year note US10YT=RR

100-244/256 2.7627

-0.077 20-year bond US20YT=RR

100-120/256 3.2175

-0.059 30-year bond US30YT=RR

97-156/256 2.9968

-0.068

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

26.00

0.25

spread

U.S. 3-year dollar swap

7.75

-0.25

spread

U.S. 5-year dollar swap

3.00

-0.50

spread

U.S. 10-year dollar swap

4.75

-1.00

spread

U.S. 30-year dollar swap

-30.75

-0.75

spread



U.S. retail sales unexpectedly fall in May

Americans feel the heat as U.S. annual inflation posts largest gain since 1981



Editing by David Holmes and Josie Kao

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