Hike rates

TREASURY – Yields were little changed after Fed minutes showed need for rate hikes

Band Herbert Lash and Karen Brettell

NEW YORK, May 25 (Reuters)Reference US Treasury yields have changed little Wednesday after Federal Reserve minutes showed policymakers agreed to raise interest rates by half a percentage point to fight inflation and said a ‘really strong’ economy may require a reduction in the money supply.

Yields earlier in the session hit six-week lows after Data show New orders for US-made capital goods rose less than expected in April, suggesting that headwinds are already building due to rising rates and tighter financial conditions.

The return on 10-year treasury bills US10YT=RRslipped 1.5 basis points for 2.745% after falling in the morning to 2.708%, a low last seen on March 14.

Minutes from a policy-making meeting earlier in May show the Fed scrambling to figure out the best way to bring inflation down without causing a recession or significantly increasing the unemployment rate. Several policy makers said the task would prove difficult in the current environment.

Policymakers agreed that inflation risks were skewed to the upside and that a “tight” stance, or a cut in the money supply, may well become appropriate, according to the minutes.

RRates fell because the bond market sees the economy slowing and the pace of inflation starting to slow as well, said Joseph LaVorgna, chief economist for the Americas at Natixis.

“We have seen a significant rally in long rates from where we were a few weeks ago,” LaVorgna said. “This rally is entirely due to lower market expectations for the final federal funds rate.”

The Treasury Department sold $48 billion in five-year notes at auction at a high yield of 2.736%, a fraction above the market at the auction deadline.

Selling was poor, said Lou Brien, strategist at DRW Trading Group.

The U.S. government saw strong demand on Tuesday for a sale of $47 billion in two-year notes, the first sale this week of $137 billion in new coupon debt. , AUCTIONS16

The yield of the 30-year Treasury bond US30YT=RR has been down 0.4 basis points for 2.968%.

A closely watched part of the U.S. Treasury yield curve measuring the spread between two- and 10-year Treasury yields US2US10=RRconsidered as an indicator of economic expectations, was at 23.7 basis points.

The two years US2YT=RR The US Treasury yield, which generally moves in line with interest rate expectations, was down 1.5 basis points to 2.506%. In early May, they hit a more than three-year high of 2.844%.

The five-year U.S. Treasury Inflation-Protected Securities (TIPS) break-even rate US5YTIP=RR was the last to 2.905%.

The 10-year TIPS break-even rate US10YTIP=RR was the last to 2.581%, indicating that the market expects inflation to average nearly 2.6% per year for the next decade.

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, was last at 2.485%.

May 25 Wednesday 3:32 p.m. New York / 1932 GMT

Price

Current yield %

Net change (bps)

Three-month bills US3MT=RR

1.05

1.0674

0.002

Half-yearly invoices US6MT=RR

1.4725

1.5042

0.002

Two-year ticket US2YT=RR

99-253/256

2.506

-0.015

Three-year ticket US3YT=RR

100-82/256

2.637

-0.025

Five-year ticket US5YT=RR

100-32/256

2.7225

-0.034

Seven-year note US7YT=RR

100-182/256

2.7614

-0.029

10 year ticket US10YT=RR

101-32/256

2.7452

-0.015

20 year bond US20YT=RR

101-128/256

3.1481

-0.013

30 year bond US30YT=RR

98-40/256

2.9683

-0.004

DOLLAR EXCHANGE GAP

Last (bps)

Net change (bps)

2-year US dollar swap spread

28.25

-2.50

3-year US dollar swap spread

3:25 p.m.

1.75

5-year US dollar swap spread

3.50

1.25

10-year US dollar swap spread

6.50

1.25

30-year US dollar swap spread

-23.50

2.50

(Reporting by Karen Brettell; Editing by Kirsten Donovan and Nick Zieminski)

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