Yields dip, Wednesday’s inflation data in focus


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NEW YORK — U.S. Treasury yields dipped on

Monday as investors continued to digest an unexpectedly strong

jobs report from Friday and before highly anticipated inflation

data on Wednesday, which will be scrutinized for how

aggressively the Federal Reserve is likely to continue interest

rates hikes.

Yields have risen off four-month lows reached last week as

persistently high inflation, hawkish comments from Fed officials

and a strong labor market dampen expectations that the U.S.

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central bank will take its foot off the pedal to dampen soaring

price pressures.

Yields spiked on Friday after data showed U.S. job growth

unexpectedly accelerated in July, with employers adding 528,000

in the month, while the level of employment rose above its

pre-pandemic level.

“The jobs report was strong pretty much anyway you want to

slice it, adding to the case for a 75 basis point hike in

September,” said Benjamin Jeffery, an interest rate strategist

at BMO Capital Markets in New York.

Consumer price inflation (CPI) data for July will be the

next major economic release on Wednesday. It is expected to show

that prices rose at an 8.7% annual pace during the month,

according to the median estimate of economists polled by

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Reuters.

“What is most important I think is Wednesday’s CPI data to

determine how large (the Fed) will opt to go in September,” said

Jeffery.

Fed funds futures traders are now pricing for a 69% chance

of another 75 basis points rate increase in September, and for

the fed funds rate to rise to 3.62% by March, from 2.33% now.

Fixed income analysts at JPMorgan said that they now expect

a 75 bps hike in September, following the strong jobs data.

“Friday’s numbers should mollify recession fears but amplify

concerns that the Fed has a lot more work to do,” analysts led

by Alex Roever said in a report, adding that a rise in wages

will increase inflation concerns.

Average hourly earnings gained 0.5% in July after rising

0.4% in June. That left the year-on-year increase in wages at

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5.2%.

A New York Federal Reserve survey on Monday, meanwhile,

showed that U.S. consumers’ expectations for where inflation

will be in a year and three years dropped sharply in July.

Benchmark 10-year note yields fell to 2.763% on

Monday, after getting as high as 2.869% on Friday, the highest

since July 22. Two-year yields were last 3.216%,

after reaching 3.331% on Friday, the highest since June 16.

The yield curve between two-year and 10-year notes

was at minus 46 basis points, the deepest

inversion since 2000.

Safe haven bonds also saw some demand on geopolitical

concerns as China’s military announced fresh drills on Monday in

the seas and airspace around Taiwan, a self-governed island

China claims as its own. The drills come a day after the

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scheduled end of its largest ever exercises to protest last

week’s visit to Taipei by U.S. House Speaker Nancy Pelosi.

The Treasury will sell $98 billion in new coupon-bearing

supply this week, including $42 billion in three-year notes on

Tuesday, $35 billion in 10-year notes on Wednesday and $21

billion in 30-year bonds on Thursday.

August 8 Monday 3:03PM New York / 1903 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 2.4825 2.532 0.002

Six-month bills 2.9925 3.0794 0.015

Two-year note 99-151/256 3.2157 -0.032

Three-year note 99-150/256 3.1485 -0.045

Five-year note 99-66/256 2.9112 -0.063

Seven-year note 98-148/256 2.8512 -0.068

10-year note 100-244/256 2.7627 -0.077

20-year bond 100-120/256 3.2175 -0.059

30-year bond 97-156/256 2.9968 -0.068

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 26.00 0.25

spread

U.S. 3-year dollar swap 7.75 -0.25

spread

U.S. 5-year dollar swap 3.00 -0.50

spread

U.S. 10-year dollar swap 4.75 -1.00

spread

U.S. 30-year dollar swap -30.75 -0.75

spread

(Editing by David Holmes and Josie Kao)

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