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TREASURIES-U.S. yields sink after data shows economy slowing as rate hikes start to bite

Reuters · 01/06/2023 16:10
TREASURIES-U.S. yields sink after data shows economy slowing as rate hikes start to bite

Adds comment, updates prices

U.S. jobs rise more than expected, but wage gains slow

U.S. services sector contracts in December; factory orders slump

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

U.S. two-year/10-year curve lessens inversion after slew of 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 declined in November as well after posting gains in the previous month, suggesting, analysts said, that along with other pieces of economic data, past rate increases by the Federal Reserve may be finally taking their 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 -70 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 fewer 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 bond market is anticipating that the Fed is getting closer to the end game. But it's very clear where the Fed winds up," said Gregory Faranello, head of U.S. rates at AmeriVet Securities in New York.

"The Fed still has work to do. They want to get to around 5%. But the reality is the cost of funding at 5% -- if they hold it there and have the perseverance to hold it there -- will have implications for the market and inflation, which they want to come down," he added.

U.S. 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 afternoon trading, U.S. 10-year yields US10YT=RR slid to two-week troughs of 3.551%. The yield was last down 16.6 bps at 3.556%.

U.S. 30-year yields also declined to a two-week low of 3.671%, last down 11.6 bps at 3.682% US30YT=RR.

On the shorter-end of the curve, U.S. two-year yields also stumbled to the lowest in two weeks of 4.245%. They last traded down 19.9 bps at 4.253% 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 around 4.95%, expected to be reached at the June policy gathering. FEDWATCH

In other parts of the Treasuries market, 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 slipped to 2.221%. The five-year breakeven rate meant that investors expect inflation, as measured by the consumer price index, to average around 2.221% over the five years.

The 10-year TIPS breakeven rate USBEI10Y=RR was last at 2.206%, down 2.1 bps.

January 6 Friday 3:48PM New York / 2048 GMT


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(Reporting by Gertrude Chavez-Dreyfuss; Editing by David Evans and Andrea Ricci)

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