Quantitative Easing

TREASURY-US yields fall as recession fears linger

Band Herbert Lash

NEW YORK, July 29 (Reuters)Treasury yields at tit is long overdrifted lower Friday after data on labor costs and wage growth suggested inflation remained sticklish and raises fears of a recession as the Federal Reserve seeks to cool the economy without causing a sharp downturn.

The employment cost index rose 1.3% in the last quarter, with labor costs rising 5.1% on an annual basis, the Labor Department reported, while wages and treatments increased 10.4% in the second quarter and increased by 5.3% over one year.

“Markets are pricing in a recession and they seem to be doing it fairly quickly,” said Tom di Galoma, managing director of Seaport Global Holdings in Greenwich, Connecticut. “Everyone is worried that inflation will get worse and yields will go back up at some point.”

The benchmark 10-year Treasury bond yield US10YT=RR slid 5.7 basis points toh 2.624%, down from a high of 2.845% at the start of the week.

Falling yields put the 10-year on track to fall 33 basis points in July, the biggest monthly drop since March 2020.

The spread between the yields of two- and ten-year Treasury bills US2US10=RRa closely watched part of the yield curve as it can signal a recession when the short end is higher than the long end, was at -26.6 basis points, widening from -14.70 eearlier.

The two years US2YT=RR The US Treasury yield, which generally moves in line with interest rate expectations, rose 1.1 basis points to 2.889%.

The 10-year TIPS break-even rate US10YTIP=RRa gauge of inflation expectations, rose to 2.528%, indicating that the market expects inflation to average around 2.5% per year over the next decade.

Earlier in the week, he suggested inflation of 2.4%.

“The market is now pricing in rate cuts through 2023, betting the Fed will have to step in as growth prospects deteriorate,” said Mauricio Agudelo, head of fixed income at Homestead Advisors in Arlington, Va. “We expect the yield curve to remain inverted and the Fed’s removal of forward guidance will add to market volatility for the remainder of the year.”

The Commerce Department on Thursday reported the second consecutive quarterly decline in gross domestic product, as consumer spending grew at its slowest pace in two years and business spending fell.

The Fed up wednesday the federal funds rate by 75 basis points for the second time in two months, but many investors see inflation as on the mend and will keep the U.S. central bank of an aggressive tightening policy.

EThe evidence suggests that inflation is on the mend and that a recession, if there is one, will be short and shallow, said Russell Price, chief economist at Ameriprise Financial in Troy, Michigan.

However, consumers may be surprised when they see energy bills this winter as the United States exports more natural gas, mostly to Europe, to offset dwindling Russian supplies, he said. .

“We believe US prices could rise further given that global natural gas prices are much higher than domestic rates,” Price said in a note.

The return on 30-year notes US30YT=RR fell 7.8 basis points to 2.961%.

The five-year U.S. Treasury Inflation-Protected Securities (TIPS) break-even rate US5YTIP=RR was last at 2.768%.

The US dollar 5-year inflation-linked swap USIL5YF5Y=Rconsidered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, last stood at 2.533%.

July 29 Friday 2:45 p.m. New York / 6:45 p.m. GMT

Price

Current yield %

Net change (bps)

Three-month bills US3MT=RR

2.325

2.3706

-0.015

Half-yearly invoices US6MT=RR

2.805

2.884

0.044

Two-year ticket US2YT=RR

100-55/256

2.8885

0.011

Three-year ticket US3YT=RR

100-134/256

2.8138

-0.006

Five-year ticket US5YT=RR

100-88/256

2.676

-0.027

Seven-year note US7YT=RR

99-184/256

2.6693

-0.041

10 year ticket US10YT=RR

102-40/256

2.6235

-0.057

20 year bond US20YT=RR

101-52/256

3.1675

-0.085

30 year bond US30YT=RR

98-72/256

2.9621

-0.077

DOLLAR EXCHANGE GAP

Last (bps)

Net change (bps)

2-year US dollar swap spread

26:00

0.25

3-year US dollar swap spread

10.75

0.00

5-year US dollar swap spread

3.00

-0.25

10-year US dollar swap spread

7.00

-0.75

30-year US dollar swap spread

-27.00

-1.75

(Reporting by Herbert Lash editing by Mark Heinrich and Chizu Nomiyama)

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