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TREASURIES-Yields fall as aggressive Fed creates growth concerns

·4 min read

(Adds comments from Fed officials, 20-year auction results, quotes, updates prices) By Karen Brettell NEW YORK, June 22 (Reuters) - U.S. Treasury yields fell to almost two-week lows on Wednesday as fears grew that the Federal Reserve will cause a recession by aggressively tightening monetary policy as it tackles soaring inflation. Fed Chairman Jerome Powell on Wednesday said that the U.S. central bank is not trying to engineer a recession, but is fully committed to bringing prices under control even if doing so risks an economic downturn. The comments come after the U.S. central bank last week hiked rates by 75 basis points, the biggest increase since 1994, and signaled that a similar move is possible in July. Yields have dropped from more than decade highs reached before last week’s Fed meeting on concerns that rapid rate hikes will dent the economy. “The Fed knows that inflation is a problem, they know they need to get their hands around it and rate increases are the only real tool that they have to do that,” said Thomas Simons, a money market economist at Jefferies in New York. That said, Simons said that Powell was slightly less aggressive than he was after last week’s meeting as he stated that future moves will depend on economic data. “It’s the dovish side of very hawkish,” Simons said. “It’s a little bit less clear and a little bit less than totally committed.” Philadelphia Fed President Patrick Harker said on Wednesday said if data in coming weeks show demand is slowing faster than he expects, he would support a smaller half-point rate hike in July; otherwise, he would support a bigger rate hike. Chicago Fed Bank President Charles Evans also signaled he'd likely back another big interest rate hike in July unless inflation data improves and nodded to the risk of a downturn because the Fed cannot "fine-tune" the economy's response to rising borrowing costs. Economists polled by Reuters expect the Fed to hike by another 75 basis points in July, followed by a half-percentage-point rise in September, and that it would not scale back to quarter-percentage-point moves until November at the earliest. Bonds also got a boost on Wednesday as oil prices tumbled on news of a plan by U.S. President Joe Biden to cut fuel costs for drivers and as recession fears dented demand. “The overnight session featured a pretty big drubbing in energy, commodities prices and that’s putting a little bit of a deflationary bid into the curve,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. Two-year Treasury yields fell to 3.056%. They have fallen from 3.456% on June 14, which was the highest since November 2007. Benchmark 10-year yields were at 3.156%, after reaching 3.498% on June 14, the highest since April 2011. The closely watched yield curve between two-year and 10-year notes was at 9 basis points, after inverting early last week. An inversion in this part of the curve is seen as a reliable indicator that a recession is likely in one to two years. Inflation expectations also fell. Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS), a measure of expected annual inflation for the next five years, fell to 2.77, the lowest since Feb. 22. The Treasury Department saw average demand for a $14 billion sale of 20-year bonds on Wednesday. The bonds sold at a high yield of 3.488%, with a bid-to-cover ratio of 2.60 times. The Treasury will also sell $18 billion in five-year TIPS on Thursday. June 22 Wednesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 1.565 1.593 -0.095 Six-month bills 2.345 2.4061 -0.055 Two-year note 98-246/256 3.056 -0.142 Three-year note 99-24/256 3.1963 -0.159 Five-year note 97-70/256 3.2266 -0.152 Seven-year note 96-254/256 3.2374 -0.156 10-year note 97-160/256 3.1561 -0.149 20-year bond 96-136/256 3.4932 -0.148 30-year bond 93 3.2423 -0.148 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 39.25 -0.75 spread U.S. 3-year dollar swap 16.25 -0.50 spread U.S. 5-year dollar swap 3.75 -0.25 spread U.S. 10-year dollar swap 7.25 0.75 spread U.S. 30-year dollar swap -25.50 2.00 spread (Reporting by Karen Brettell; Editing by Chizu Nomiyama)

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