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TREASURIES-U.S. yields drop on data showing slowing economy

Reuters · 01/06/2023 11:34
TREASURIES-U.S. yields drop on data showing slowing economy

Adds comment, U.S. services sector, factory orders data, updates prices

U.S. jobs rise more than expected, but wage rise slows

U.S. services sector contracts in December, factor orders slump

U.S. rates market price in two 25-bps hikes in two meetings

U.S. two-year/10-year curve lessens inversion after jobs data

By Gertrude Chavez-Dreyfuss


- U.S. Treasury yields tumbled on Friday after data showed signs of an economy slowing down as wages rose less than expected last month even though jobs increased more than anticipated, while the U.S. services sector shrank for the first time in more than 2-1/2 years.

U.S. factory orders also declined in November after posting gains in the previous month, suggesting that along with other pieces of economic data, past rate increases by the Federal Reserve may be finally taking its toll on the economy.

Friday's reports also reinforced expectations that the Fed could be a pause in its rate-hiking cycle.

U.S. yields across the curve mostly dropped to two-week lows in the aftermath of the services sector and factory orders data.

A widely-tracked part of the U.S. yield curve, measuring the gap between yields on two- and 10-year Treasury US2US10=TWEB, lessened its inversion to -69.2 basis points (bps). The inversion, which typically foreshadows recession, went as deep as -79.20 bps right after the jobs report, the most inverted in three weeks.

The of the curve inversion on Friday indicated that investors are pricing in less rate hikes by the Fed.

Data showed that U.S. -farm payrolls rose 223,000 last month. Economists polled by Reuters had forecast payrolls increasing by 200,000 jobs.

Average hourly earnings rose 0.3% in December after 0.4% in the prior month. That reduced the year-on-year increase in wages to 4.6% from 4.8% in November.

"The Federal Reserve has indicated that they are willing to pause and let cumulative effects of past rate hikes continue to filter through the system," said Keith Buchanan, portfolio manager at GLOBALT Investments in Atlanta.

"I definitely think the Fed is looking for a moment to pause and this report can lead them to do it. Of course, we would other reports to confirm this," he added.

Data also showed that the Institute for Supply Management's(ISM) -manufacturing index dropped to 49.6 last month from 56.5 in November. It was the first time since May 2020 that the services reading fell below the 50 threshold, which indicates contraction in the sector that accounts for more than two-thirds of U.S. economic activity.

Paul Ashworth, chief North America economist, at Capital Economics wrote in a that the ISM data showed "more evidence of disinflationary pressure but, unlike the employment Report, consistent with recession rather that a soft landing."

U.S. factory orders also slumped, falling 1.8% in November after gaining 0.4% in October.

In late morning trading, U.S. 10-year yields US10YT=RR slid to two-week troughs of 3.571%. The yield was last down 14.4 14.4 bps at 3.578%.

U.S. 30-year yields also declined to a two-week low of 3.69%, last down 10.4 bps at 3.694% US30YT=RR.

On the shorter-end of the curve, U.S. two-year yields also stumbled to its lowest in two weeks. They last traded down 18.5 bps at 4.268% US2YT=RR.

The rate futures market has priced in 25-bps hikes at the two policy meetings. The peak fed funds rates is seen at 5%, expected to be reached at the June policy gathering. FEDWATCH

In other segments of the Treasuries market, the U.S. breakeven inflation rates were mostly lower, reversing earlier increases.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) USBEI5Y=RR was last at 2.244%. The five-year breakeven rate suggested that investors expect inflation, as measured by the consumer price index, to average around 2.244% over the five years.

The 10-year TIPS breakeven rate USBEI10Y=RR was last at 2.21%, down 1.5 bps.


January 6 Friday 11:18AM New York / 1618 GMT


Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

4.5275

4.6412

0.019

Six-month bills US6MT=RR

4.6525

4.8282

-0.021

Two-year US2YT=RR

99-244/256

4.2744

-0.179

Three-year US3YT=RR

99-242/256

4.0191

-0.183

Five-year US5YT=RR

100-158/256

3.7377

-0.173

Seven-year US7YT=RR

101-68/256

3.6676

-0.163

10-year US10YT=RR

104-128/256

3.5783

-0.144

20-year bond US20YT=RR

101-244/256

3.858

-0.114

30-year bond US30YT=RR

105-144/256

3.6907

-0.107





DOLLAR SWAP SPREADS




Last (bps)

Net Change (bps)


U.S. 2-year dollar swap spread

29.50

1.25


U.S. 3-year dollar swap spread

10.75

0.50


U.S. 5-year dollar swap spread

0.75

0.25


U.S. 10-year dollar swap spread

-5.75

-0.50


U.S. 30-year dollar swap spread

-47.00

-0.75



(Reporting by Gertrude Chavez-Dreyfuss; editing by David Evans)

((gertrude.chavez@thomsonreuters.com; 646-301-4124; Reuters Messaging: gertrude.chavez.reuters.com@reuters.))