U.S. yields slip on speculation Fed might slow tightening

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NEW YORK — Treasury yields fell on

Tuesday as speculation mounted again the Federal Reserve might

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signal a slower pace of policy tightening this week, even as it

is expected to raise interest rates by another 75 basis points

(bps) in its battle against inflation.

The yield on benchmark 10-year Treasury note fell below the

key 4% threshold, while two-year yields slid almost 10 bps at

one point, as the market once again took comfort from signs of a

slowing economy and hopes inflation has peaked.

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“The market is expecting that we’re getting closer and

closer to the Fed doing a pivot here. Probably not tomorrow, but

the market now is starting to question whether they need to go

75 bps in the month of December,” said Stan Shipley, managing

director and strategist at Evercore ISI in New York.

The yield on 10-year notes fell 5 bps to 4.027%,

while the two-year yield, which typically moves in

step with rate expectations, was unchanged at 4.501%. The

two-year yield briefly turned positive.

The yield spread between two- and 10-year notes

, seen as a recession harbinger when the short end

is higher than the long end, widened to -47.6 bps.

The issue for the Fed is that the core consumer price index

(CPI) remains sticky and above its 2% target, said George

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Goncalves, head of U.S. macro strategy at MUFG Securities

Americas, in a note.

In the 12 months through September core CPI was 6.6%, higher

than the August reading of 6.3% on an annual basis.

Even when pivots occur, the damage may already been done,

Goncalves said. “With high inflation it’s not as if they will

start loosening policy that soon afterwards,” he said.

Fed funds futures are pricing in a 98.4% likelihood that the

Fed will boost rates by 75 bps on Wednesday. The market has also

raised its outlook for the Fed’s target rate to peak at 4.96% in

May 2023 – counter to hopes for easing.

Thirty-year Treasury bond yields fell 9.3 bps to

4.113%.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

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2.685%.

The 10-year TIPS breakeven rate was last at

2.53%, indicating the market sees inflation averaging a bit more

than 2.5% a year for the next decade.

The U.S. dollar 5 years forward inflation-linked swap

, seen by some as a better gauge of inflation

expectations due to possible distortions caused by the Fed’s

quantitative easing, was last at 2.585%.

Nov. 1 Tuesday 10:33 AM New York / 1433 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.06 4.1595 0.003

Six-month bills 4.44 4.605 0.000

Two-year note 99-195/256 4.5011 0.000

Three-year note 99-122/256 4.4405 -0.015

Five-year note 99-154/256 4.2142 -0.035

Seven-year note 99-64/256 4.1245 -0.038

10-year note 89-192/256 4.0274 -0.050

20-year bond 87-8/256 4.3597 -0.088

30-year bond 80-248/256 4.114 -0.092

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 36.25 0.00

U.S. 3-year dollar swap spread 14.50 0.50

U.S. 5-year dollar swap spread 7.25 0.50

U.S. 10-year dollar swap spread 4.50 0.50

U.S. 30-year dollar swap spread -45.50 1.00

(Reporting by Herbert Lash

Editing by Mark Potter)