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TREASURIES-U.S. Treasuries rally after Fed rate decision

TREASURIES-U.S. Treasuries rally after Fed rate decision

Reuters · 07/27/2022 16:34
TREASURIES-U.S. Treasuries rally after Fed rate decision

Adds comment, fresh prices

By Herbert Lash

- Treasury yields edged lower as bonds rallied on Wednesday after the Federal Reserve hiked interest rates by 75 basis points as it tightens monetary policy in an effort to curb inflation while trying to steer the U.S. economy away from a hard landing.

The increase was widely expected and raised the federal funds rate to a range between 2.25% and 2.5%, a sharp jump since zero in March as the U.S. central bank battles the highest inflation rate in four decades.

The Nasdaq rallied more than 4% on hopes for a slower pace of rate hikes as the market looked to the Fed being done raising rates by year's end, said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions in Boston.

"With rates rallying, that's the cue for tech to be going 'game on,'" Janasiewicz said. "Rates rally and tech gets the green light from what the rates are telling them."

Rates toward session's end moved closer to little changed after a strong rally following the Fed announcement.

The bond market has been pricing in an economic slowdown, if a recession, as seen in the inversion of two- and 10-year Treasury US2US10=RR yields. The short end of the yield curve has been higher than the long end all month, but the gap to -20.5 basis points after the Fed decision.

The two-year US2YT=RR yield reversed course to fall 5.5 basis points to 2.988% as the 10-year US10YT=RR fell 0.2 basis points to 2.785%. Yields on shorter-term are lower than long-term .

The inversion of the yield curve for many signals a looming recession, but it has suffered distortions over the years, said Janasiewicz, who said he foresees a mild recession.

The Ukraine war, an energy crunch caused by supply cuts to the Nord Stream 1 gas pipeline, the bubble implosion of crypto currencies and the red-hot U.S. housing market showing signs of peeking signal the economic expansion's end, said Jimmy Chang, chief investment officer of the Rockefeller Global Family Office.

"I do give a lot of credence to the two and 10s yield curve, and it's that every cycle when we get to the inversion, you will hear the bulls arguing that this time is different," Chang said before the Fed decision.

"Then of course when we eventually wind up with a recession, we look back and say, 'Ah ha, it worked again!'" Chang added.

Another part of the yield curve closely watched for a potential recession if it inverts, the gap between three-month bills and 10-year US3MUS10Y=TWEB, also pulled back from signaling an imminent recession.

The spread fell to 36.3 basis points, down from a spread of 118.51 on July 1. Before the Fed's announcement, the gap had to 25 basis points.

The yield on the 30-year Treasury bond US30YT=RR was up 5.8 basis points to 3.066%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 2.679%.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.444%, indicating the market sees inflation averaging about 2.4% a year for the decade.

The U.S. dollar 5 years forward inflation-linked swap USIL5YF5Y=R, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.438%.


July 27 Wednesday 4:10PM New York / 2010 GMT


Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

2.3725

2.42

-0.110

Six-month bills US6MT=RR

2.8425

2.924

-0.055

Two-year US2YT=RR

100-6/256

2.9878

-0.055

Three-year US3YT=RR

100-40/256

2.9443

-0.047

Five-year US5YT=RR

99-150/256

2.8395

-0.039

Seven-year US7YT=RR

102-142/256

2.8407

-0.027

10-year US10YT=RR

100-196/256

2.7849

-0.002

20-year bond US20YT=RR

99-80/256

3.2973

0.042

30-year bond US30YT=RR

96-72/256

3.0661

0.058





DOLLAR SWAP SPREADS




Last (bps)

Net Change (bps)


U.S. 2-year dollar swap spread

25.75

2.50


U.S. 3-year dollar swap spread

11.00

2.75


U.S. 5-year dollar swap spread

2.50

2.00


U.S. 10-year dollar swap spread

7.75

0.25


U.S. 30-year dollar swap spread

-25.25

-0.75







(Reporting by Herbert Lash; Editing by Will Dunham and Jonathan Oatis)

((herb.lash@thomsonreuters.com; 1-646-223-6019))