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TREASURIES-U.S. yields slide as recession fears keep kicking

·4 min read

(Adds comment, fresh prices) By Herbert Lash NEW YORK, June 30 (Reuters) - Treasury yields slid for a third straight day on Thursday after soft U.S. consumer spending data and still elevated consumer prices kept concerns alive that the Federal Reserve will brake growth more than needed to curb rising inflation. In a sign of a slowing U.S. economy, consumer spending rose a less-than-expected 0.2% last month, the Commerce Department said. It also lowered data for April to show outlays increased 0.6% instead of 0.9% as previously reported. But inflation maintained its upward trend in May, with the personal consumption expenditures (PCE) price index rising 0.6% after gaining 0.2% in April. The PCE price index climbed 6.3% on an annual basis after advancing by the same margin in April, or more than triple the Fed's target of 2% yearly inflation. "The data were, on the margin, a little bit disappointing," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "Clearly everybody is very nervous about a recession with the central banks going all-in on tackling price pressures." The yield on 10-year Treasury notes fell 10.4 basis points to 2.989% as safe-haven buying at the long end pushed prices up and yields lower. Yields on the benchmark Treasury note are up about 150 basis points year-to-date, the largest first-half increase since the first six months of 1994. The gap between yields on two- and 10-year Treasury notes , a commonly used metric to indicate a potential recession when rates at the short end of the yield curve rise above the long end, was 4.6 basis points after flattening to 3.08 basis points in afternoon trading. The two-year U.S. Treasury yield, which often moves in step with rate expectations, skidded 11.4 basis points to 2.939%, the first time it's been under 3% this week. Rates in the middle of the curve already are inverted, or higher than the benchmark 10-year, with the three-, five- and seven-year notes at 2.997%, 3.021% and 3.048%, respectively. Investors are trying to determine when the Fed eases its rate hiking cycle once policymakers see inflation is under control, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities in New York. "How long is the lag to the Fed saying we got inflation clearly coming down in the proper direction, to the proper magnitude, that maybe we can extend out the timing of the rate hikes, not reverse them," Ricchiuto said. The market's view of how to rebalance portfolios at quarter end flipped this week as the worst of the equity downturn was believed to be over, said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas Inc in New York. "What we got is equities have not performed well, and fixed income has still gathered a decent bid the last two days" as global dynamics, especially concerns about Europe, impact the U.S. outlook, Goncalves said. "It's largely the moves in European rates and the spill-over into U.S. fixed income," he said. "They’re probably going to head into a recession and probably before we do, or at the same time." The yield on the 30-year Treasury bond was down 7.8 basis points to 3.134%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.635%. The 10-year TIPS breakeven rate was last at 2.373%, indicating the market sees inflation averaging about 2.4% a year for the next decade. The U.S. dollar five-year forward inflation-linked swap , seen by some as a better gauge of inflation expectations, was last at 2.350%. June 30 Thursday 2:22 PM New York / 1822 GMT Price Current Net Yield % Change (bps) Three-month bills 1.67 1.7003 -0.057 Six-month bills 2.44 2.5046 -0.010 Two-year note 100-30/256 2.9391 -0.114 Three-year note 99-168/256 2.9971 -0.131 Five-year note 101-14/256 3.021 -0.132 Seven-year note 101-68/256 3.0478 -0.122 10-year note 99-8/256 2.9888 -0.104 20-year bond 97-236/256 3.3944 -0.069 30-year bond 95 3.1339 -0.078 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 32.25 -2.00 spread U.S. 3-year dollar swap 13.00 -1.75 spread U.S. 5-year dollar swap 3.50 -0.25 spread U.S. 10-year dollar swap 7.75 0.00 spread U.S. 30-year dollar swap -23.00 0.75 spread (Reporting by Herbert Lash Editing by Mark Potter and Nick Zieminski)