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TREASURIES-U.S. yields slip from two-week highs as markets look to non-farm payrolls

·4 min read

* U.S. 2/10 yield curve hits deepest inversion since Sept. 2000 * U.S. factory orders, services data were better than consensus * Fed's Daly says 'reasonable' to expect 50 bps in September * U.S. Treasury cuts coupon auction sizes (Recasts, adds new comment, Fed's Daly's remarks, bullets, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Aug 3 (Reuters) - U.S. Treasury yields slipped from two-week highs on Wednesday in choppy trading, as investors digested strong U.S. economic data and hawkish comments from Federal Reserve officials that suggested more rate hikes are on the horizon. At the same time, bond investors also balanced their positions ahead of Friday's non-farm payrolls report that could partly determine the magnitude of Fed tightening needed to slow inflation. "The market got a little ahead of itself after the Fed meeting last week and so the Fed wanted to come out and say not so fast, we're still here," said Ellis Phifer, managing director, fixed income research, at Raymond James in Memphis, Tennessee. "So it's partly that and we also have non-farm payrolls on Friday. Even with a big day like yesterday, sometimes the market needs a little bit of a reprieve especially ahead of a big number," he added. Fed policymakers on Tuesday and Wednesday signaled that the central bank remains resolute in getting U.S. rates up to a level that will more significantly curb economic activity and put a dent in the highest inflation since the 1980s. Their comments came after Fed Chair Jerome Powell suggested last week that the central bank could slow the pace of its rate increases in coming months if there is evidence that tighter monetary policy is taming the worst U.S. inflation in 40 years. Also on Wednesday, a closely-tracked part of the U.S. yield curve measuring the gap between yields on two- and 10-year notes hit its deepest inversion since September 2000 of -37.20 basis points (bps), as investors priced in more rate hikes. That spread was last at -36.60 bps. The inversion of this yield curve preceded the last eight U.S. recessions, analysts said. Despite signals of recession, U.S. economic numbers on Wednesday beat expectations. The U.S. services industry unexpectedly picked up in July on strong order growth. The Institute for Supply Management's non-manufacturing index rebounded to 56.7 last month from 55.3 in June, ending three straight monthly declines. U.S. factory orders also rose in June, gaining 2% after advancing 1.8% in May. Economists polled by Reuters had forecast a 1.1% rise in factory orders. "We should see a leg wider in interest rates across the curve as the market realizes that the fed funds rate could go to three and three quarters to 4%," said Tim Leary, senior portfolio manager at RBC Global Asset Management in Stamford, Connecticut. "We are still in the infancy (stage) of slowing things down." St. Louis Fed President James Bullard on Wednesday added to the chorus of Fed comments from Tuesday suggesting that the central bank still has a long way to go to bring down inflation to its 2% target. U.S. yields came off their highs, however, after San Francisco Fed President Mary Daly, who also spoke on Tuesday, said a 50-bps hike next month would be "reasonable" if the economy evolves as expected. Fed funds futures on Wednesday now indicate a 57% chance of a 50-bps hike in September after Daly's remarks. Before she spoke, the futures market priced in more than an even chance of a 75-bps hike next month. The yield on 10-year Treasury notes fell 2.9 bps to 2.7137%, after earlier hitting a two-week high of 2.851%. The two-year U.S. Treasury yield, which typically tracks rate expectations, was little changed at 3.0774%. Earlier, that yield touched a two-week peak of 3.2%. The U.S. Treasury also announced on Wednesday it is cutting coupon issuance across all maturities in the coming quarter, with the largest cuts in 20-year maturities. August 3 Wednesday 4:12PM New York / 2012 GMT Price Current Net Yield % Change (bps) Three-month bills 2.47 2.52 -0.013 Six-month bills 2.88 2.9631 -0.018 Two-year note 99-220/256 3.0733 -0.006 Three-year note 99-242/256 3.0192 -0.014 Five-year note 99-166/256 2.826 -0.034 Seven-year note 99-4/256 2.7809 -0.042 10-year note 101-120/256 2.7028 -0.038 20-year bond 101-104/256 3.1537 -0.044 30-year bond 98-168/256 2.9429 -0.041 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 26.75 0.75 spread U.S. 3-year dollar swap 10.50 0.75 spread U.S. 5-year dollar swap 4.25 0.75 spread U.S. 10-year dollar swap 7.00 0.25 spread U.S. 30-year dollar swap -28.50 -0.25 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Will Dunham and Deepa Babington)