TREASURE – Yields fall to two-week lows on recession fears

(Adds Fed’s Powell comments, data, TIPS auction results, updates prices) By Karen Brettell NEW YORK, June 23 (Reuters) – U.S. Treasury yields fell to lows of two on Thursday weeks on fears that the Federal Reserve could cause a recession by aggressive interest rate hikes, and on the growing belief that yields may have peaked in the near term, even if inflation remains elevated. Yields fell from decade-plus highs reached before last week’s Fed meeting, when the US central bank raised rates by 75 basis points, the biggest increase since 1994, and signaled that a similar move was possible in July. Fed Chairman Jerome Powell said Thursday that the Fed’s commitment to containing inflation at a 40-year high is “unconditional” but also comes with the risk of rising unemployment. There are “growing fears of recession,” said Benjamin Jeffery, interest rate strategist at BMO Capital Markets. As worries about an economic slowdown grow, Jeffery said 10-year yields could fall back into the 2.50% to 2.75% zone, “especially if we start to see even more worrying economic data and even maybe a slowdown in terms of hiring.” Benchmark 10-year yields fell to 3.005%, before rebounding to 3.070%, rising from 3.498% on June 14 to their highest since April 2011. Two-year Treasury yields hit 2.876%, before rising to 3.012%, down from 3.456% on June 14, which was the highest since November 2007. The closely watched yield curve between bonds at two-year and 10-year was 6 basis points, after reversing early last week.A reversal in this part of the curve is considered a reliable indicator that a recession is likely in one to two years Powell said on Wednesday that the Fed was not trying to cause a recession to stop inflation, but that it was fully committed to controlling prices, even if it risked causing an economic slowdown. Fed funds futures traders lowered their expectations on the level at which the Fed is likely to raise its benchmark rate. They now expect the rate to peak at 3.55% in March, down from last week’s expectation that it would rise to around 4%. It is currently 1.58%. U.S. data on Thursday showed the number of Americans filing new claims for unemployment benefits fell slightly last week as labor market conditions remained tight, while U.S. business activity slowed significantly in June. . Bonds were boosted earlier on Thursday after a survey showed euro zone business growth slowed significantly this month – and much more than expected. The Treasury saw strong demand for an $18 billion sale of five-year Treasury inflation-protected securities (TIPS). The notes sold at a high yield of 0.362%, about 3 basis points below their pre-auction trading level, and had an average bid-to-cover ratio of 2.61 times. Inflation expectations priced into the notes fell last week as fears of a recession grew. Break-even rates, a measure of expected annual inflation for the next five years, hit 2.69% on Thursday, the lowest since Feb. 8. They are down from the 3.25% high reached in five weeks on June 13. June 23 Thursday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-Month Bills 1.605 1.6338 0.041 Six-Month Bills 2.365 2.4267 0.021 Two-Year Bills 99-11/256 3.0124 -0.044 Three-year bonds 99-82/256 3.1158 -0.080 5-year bond 97-174/256 3.136 -0.091 7-year bond 97-142/256 3.145 -0.091 10-year bond 98-88/256 3.0702 – 0.086 20-year bond 97-84/256 3.4364 – 0.056 30-year bond 94-24/256 3.1826 -0.059 DOLLAR SWAP SPREADS Last (bps) Net change (bps) US dollar 2-year swap 36.75 -2, 50 3-year US dollar swap spread 15.75 -0.75 5-year US dollar swap spread 3.25 -0.50 10-year US dollar swap spread 6.75 -0.50 30-year US dollar swap spread -25.75 -0.25 spread (Reporting by Karen Brettell in New York Additional reporting by Dhara Ranasinghe in London Editing by Jonathan Oatis and Mat w Lewis)

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