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TREASURIES-U.S. yields slip as inflation fears hound investors

·4 min read

(Adds fresh prices, Reinhardt comment) By Herbert Lash NEW YORK, June 29 (Reuters) - U.S. Treasury yields declined for a second consecutive day on Wednesday as the market took a cool view of the Federal Reserve's ability to corral inflation without throwing the economy into recession. Fed Chief Jerome Powell said on Wednesday that there is a risk the Fed's interest rate hikes will slow the economy too much, but the bigger risk is persistent inflation that allows public expectations about prices to drift higher. "The bigger mistake would be to fail to restore price stability," Powell said at a European Central Bank conference in Sintra, Portugal. Data on Thursday is expected to show that the personal consumption expenditures price index remained more than triple the Fed's 2% inflation target in May. World Bank chief economist Carmen Reinhart told Reuters in an interview she is skeptical that the U.S. and global economies can dodge a recession, given spiking inflation, sharp hikes in interest rates and slowing growth in China. Stan Shipley, fixed-income strategist at Evercore ISI, said markets will remain choppy as investors and traders read into the economic data what they want to see. "We're getting slower economic data, some sectors look to be in recession, other sectors look to be in pretty good shape," he said. "Ultimately the Fed is going to take down inflation so that by the time we get into September and October, inflation data will start to be rolling over," he said. The yield on 10-year Treasury notes fell 10.5 basis points to 3.102%, while the two-year's yield slid 6.5 basis points to 3.059%. The gap between the yields on the two- and 10-year notes , a commonly used metric for indicating a potential recession when rates at the short end of the yield curve are higher than the long end, flattened to 3.9 basis points. Rates in the middle of the curve already are inverted, with yields on the three-, five- and seven-year notes higher than the 10-year at 3.134%, 3.162% and 3.180%, respectively. There is a risk that U.S. businesses and households could see price pressures persisting for a long time, Cleveland Federal Reserve President Loretta Mester said on Wednesday. Mester told CNBC that if economic conditions remain the same she will push for a 75 basis-point rise in rates at the Fed's next policy meeting on July 26-27. The Fed raised its benchmark overnight interest rate two weeks ago by 75 basis points - its biggest increase since 1994 - to a range of 1.50% to 1.75%, and signaled its policy rate would rise to 3.4% by the end of this year. The yield on the 30-year Treasury bond fell 9.4 basis points to 3.218%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.641%. The 10-year TIPS breakeven rate was last at 2.391%, indicating the market sees inflation averaging about 2.4% 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 2.429%. June 29 Wednesday 2:46 PM New York / 1846 GMT Price Current Net Yield % Change (bps) Three-month bills 1.735 1.7668 -0.013 Six-month bills 2.45 2.5152 -0.029 Two-year note 99-227/256 3.0588 -0.065 Three-year note 99-70/256 3.1337 -0.086 Five-year note 100-104/256 3.1615 -0.102 Seven-year note 100-112/256 3.1798 -0.104 10-year note 98-20/256 3.1022 -0.105 20-year bond 96-216/256 3.471 -0.100 30-year bond 93-112/256 3.2185 -0.094 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 33.50 1.25 U.S. 3-year dollar swap spread 14.50 -0.25 U.S. 5-year dollar swap spread 3.75 0.75 U.S. 10-year dollar swap 7.75 0.50 spread U.S. 30-year dollar swap -23.75 1.00 spread (Reporting by Herbert Lash Editing by Peter Graff and Nick Zieminski)