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TREASURIES-U.S. yields slide for third day as slowdown fears mount

·4 min read

* U.S. yield curve flattens in four of last five sessions * Fed funds futures firmer suggesting pullback in steep hike view * Focus on FOMC minutes next week, slew of U.S. data (Adds new comments, bullets, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, May 20 (Reuters) - U.S. Treasury yields fell for a third straight session on Friday, with benchmark 10-year yields hitting fresh three-week lows, as investors grew concerned about increasing signs of an economic slowdown even as the Federal Reserve vowed to stay aggressive with monetary tightening. "The chance of recession is growing but the Fed doesn't respond by backing off," said Jim Vogel, senior rates strategist, at FHN Financial in Memphis, Tennessee. He added that he expects inflation to remain high for the rest of the decade. The S&P 500 sank on Friday, putting the market benchmark on the cusp of confirming it has been in a bear market since hitting a record high in January. That has boosted the appeal of Treasuries as a safe haven. Fed funds futures were firmer, suggesting that the U.S. rate market has pulled back a bit from some of its more extreme rate hike estimates on the view that the Fed may have to scale back on its tightening plan, involving multiple 50 basis-point increases, as the economy slows down. The rates market on Friday had priced in a fed funds rate of 2.783% at the end of next year, compared with the current level of 0.83%. That was as high as 2.9% two weeks ago. BofA Securities, in its latest research note, said there had been a "market sea change in rate views" over the last two weeks. It reaffirmed its call last month of going long duration when the 10-year yield was between 2.8%-2.85%. The U.S. bank cited several factors such as yields having overshot fundamentals, Fed pricing looking full, growth and inflation easing and signs of an economic slowdown in surveys. In afternoon trading, the benchmark U.S. 10-year yield fell 7.4 basis points to 2.7811%, after earlier touching 2.774%, a three-week trough. The 30-year yield fell as well, dipping 7.3 bps to 2.994% . On the front end of the curve, U.S. two-year yields dipped 3.3 bps to 2.578%. The yield curve flattened again on Friday, with the spread between U.S. two- and 10-year yields narrowing to 20 bps . It has flattened in four of the last five sessions. Friday brought little action in terms of U.S. economic data and events, but next week should be hectic. The minutes of the last Federal Open Market Committee meeting are due for release on Wednesday, while Kansas City Fed President Esther George, a voter on this year's FOMC, and Atlanta Fed President Raphael Bostic are scheduled to speak next week. "Wednesday's FOMC minutes release carries with it a meaningful amount of event-risk; most of it hawkish," wrote BMO Capital in a research note. "Within this discussion, we cannot help but assume there were those more hawkishly-minded advocating for a 75 basis-point hike if not 100 bps. It's those headlines that will presumably define the initial reaction to the minutes release." There is data as well such as U.S. new home sales, durables, revised gross domestic product for the first quarter, as well personal income and consumption. May 20 Friday 3:35PM New York / 1935 GMT Price Current Net Yield % Change (bps) Three-month bills 1.0175 1.0342 -0.013 Six-month bills 1.45 1.4808 -0.021 Two-year note 99-217/256 2.5806 -0.030 Three-year note 100-16/256 2.7279 -0.049 Five-year note 99-196/256 2.8009 -0.048 Seven-year note 100-88/256 2.8199 -0.057 10-year note 100-196/256 2.7865 -0.069 20-year bond 101-8/256 3.1797 -0.072 30-year bond 97-156/256 2.9964 -0.069 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 28.25 -1.25 spread U.S. 3-year dollar swap 13.25 -1.00 spread U.S. 5-year dollar swap 2.50 -0.75 spread U.S. 10-year dollar swap 5.50 -0.75 spread U.S. 30-year dollar swap -27.50 -1.00 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alison Williams and Chizu Nomiyama)