US yields hit 4-week peaks after weak auction; yield curve inversion narrows

USA-BONDS/ (UPDATE 1):TREASURIES-US yields hit 4-week peaks after weak auction; yield curve inversion narrows

Reuters
First Published30 May 2024
US yields hit 4-week peaks after weak auction; yield curve inversion narrows
US yields hit 4-week peaks after weak auction; yield curve inversion narrows

*

U.S. yield curve cuts inversion to narrowest in two weeks

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U.S. seven-year note auction shows weak results

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Fed survey shows expanding economy, inflation

(Updates prices; adds bullets, comment, results of seven-year note auction, background)

By Karen Brettell and Gertrude Chavez-Dreyfuss

NEW YORK May 29 (Reuters) - U.S. Treasury yields rose to four-week peaks across the board on Wednesday, as yet another weak debt auction and cautious comments from Federal Reserve officials on the timing of the U.S. central bank's easing cycle weighed on market sentiment.

U.S. two-year to 30-year yields hit their highest levels since early May, with the benchmark two-year/10-year yield curve reducing its inversion to its narrowest gap in two weeks. Analysts said the yield curve move reflected market worries about higher growth and inflation expectations.

The spread between U.S. two- and -10 year yields, which historically has predicted eight of the last nine recessions, touched minus 35.8 basis points on Wednesday, the tightest since mid-May. It was last at minus 36.3 bps.

The curve last Friday hit its most inverted level since March 12 in the wake of stronger-than-expected U.S. data. It came close to eclipsing the minus 50-bp level, which would have been the most inverted since December.

Minneapolis Fed President Neel Kashkari said in an interview with CNBC late on Tuesday that the U.S. central bank

should wait

for significant progress on inflation before cutting interest rates. He added that the Fed could potentially even raise rates if inflation fails to come down further.

His comments, which had pushed yields higher, echoed remarks from other Fed officials, including Governor Christopher Waller.

"A consistent stream of comments from Fed policymakers has reinforced the notion that the Fed is going to be very cautious as it moves forward," said Chip Hughey, managing director of fixed income at Truist Advisory Services.

"The Fed means what it says when policymakers say that they are going to need significantly more sufficient disinflation evidence before moving forward with rate cuts."

LACKLUSTER AUCTION

Treasury yields extended their rise after another soft auction on Wednesday. The sale of $44 billion in U.S. seven-year debt resulted in a high yield of 4.65%, higher than the expected rate at the bid deadline, suggesting that investors sought a premium to purchase the note.

The bid-to-cover ratio, a measure of demand was 2.43, lower than last month's 2.48 and the average of 2.55.

The seven-year note sale, which followed equally

lackluster auctions

of U.S. two-year and five-year notes on Tuesday, raised concerns about future demand for government debt.

U.S. yields jumped on Tuesday after consumer confidence unexpectedly improved in May and after those poorly-received auctions.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, says the move in Treasuries in large part reflects that the recent move in the yield curve got overextended.

"I would characterize the move more as a technical response to a 2s/10s reaching the depths of the inversion of the year, and then retracing," Lyngen said. "We did have some lackluster receptions to the auctions, but I don't think that that's truly the defining event."

In afternoon trading, the benchmark U.S. 10-year yield rose 7.2 bps to 4.613%. Earlier it advanced to 4.638%, the highest level since May 1.

The U.S. two-year yield, which reflects rate-move expectations was up 2 bps at 4.976%, after earlier rising to a four-week high of 5%.

Traders are gauging when the Fed is likely to begin cutting rates as inflation remains stubbornly elevated above its 2% annual target. Consumer price inflation eased in April, but central bank officials have stressed they need to see several months of improvement before easing monetary policy.

Highlighting that concern, a Fed survey on Wednesday said the U.S. economic activity continued to expand from early April through mid-May, but firms grew more pessimistic about the future while inflation increased at a modest pace.

This week's main U.S. economic data will come on Friday when the government is due to release the personal consumption expenditures price index for April. The PCE is the Fed's preferred inflation gauge. The release of monthly employment and consumer price inflation reports next month, meanwhile, are likely to drive market direction in the near-term.

The May CPI release is due on June 12, before the Fed is also scheduled to give its latest economic and interest rate projections at the conclusion of the central bank's June 11-12 policy meeting. (Reporting By Karen Brettell and Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis and Paul Simao)

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