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TREASURIES-Yield curve inverts further as hawkish Fed adds to growth concerns

·4 min read

(Updates prices) By Karen Brettell NEW YORK, Sept 21 (Reuters) - The U.S. bond yield curve inverted further on Wednesday after the Federal Reserve hiked rates by 75 basis points and signaled more increases to come, adding to fears about an economic downturn. Yields initially surged, with benchmark 10-year notes hitting the highest since 2011 and two-year yields the highest since 2007, after the U.S. central bank's target interest rate was increased to a range of 3.00%-3.25%. New projections showed its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023. Fed Chairman Jerome Powell said after the policy statement that central bank officials are "strongly resolved" to bringing down inflation from four-decade highs and "will keep at it until the job is done." "Until there is a major slowdown in inflation, the Fed will continue to hike. Financial markets are finally getting the message that the Fed will not blink," said Kevin Nicholson, global fixed income chief investment officer at Riverfront Investment Group in Virginia. But yields retraced from their highs after Powell said the so-called "dot plot" of rate and economic expectations do not represent a plan or commitment, underscoring the difficulty in forecasting the path of the economy. "With recession looking virtually impossible to avoid, we see a strong chance of policy reversal later in 2023," analysts at ING said in a note, adding that "despite the hawkishness of the Fed today, the market is tentatively pricing in nearly 50bp of rate cuts in 2023." The Fed's economic projections showed the economy slowing to a crawl in 2022, with year-end growth at 0.2%, rising to 1.2% in 2023, well below the economy's potential. The unemployment rate is projected to rise to 3.8% this year and 4.4% in 2023. Inflation is seen slowly returning to the Fed's 2% target in 2025. Two-year Treasury yields were last 4.059%, after earlier reaching 4.123%, the highest since October 2007. Benchmark 10-year U.S. Treasury yields were 3.534%, after earlier hitting 3.640%, the highest since February 2011. The closely watched yield curve between two-year and 10-year notes inverted further to minus 52 basis points, indicating concerns about a recession in the next one-to-two years. The curve between five-year and 30-year bonds also inverted to minus 27 basis points, the deepest inversion since 2000. Real yields, which adjust for expected inflation, also jumped but ended the day off their highs. Five-year yields on Treasury Inflation-Protected Securities (TIPS) were last 1.327%, after earlier reaching 1.422%, the highest since August 2009. Ten-year TIPS yields were 1.171%, after hitting 1.246%, the highest since February 2011. Yields had eased earlier on Wednesday as concerns about an escalation of the war between Russia and Ukraine modestly boosted demand for safe haven U.S. debt. President Vladimir Putin ordered Russia's first wartime mobilization since World War Two on Wednesday, shocking his countrymen with what Western countries described as an act of desperation in the face of a losing war. September 21 Wednesday 5:17PM New York / 2117 GMT Price Current Net Yield % Change (bps) Three-month bills 3.2325 3.3044 -0.044 Six-month bills 3.7975 3.9256 0.024 Two-year note 98-129/256 4.0591 0.095 Three-year note 98-148/256 4.0107 0.074 Five-year note 97-32/256 3.768 0.015 Seven-year note 96-160/256 3.6803 -0.016 10-year note 93-128/256 3.5338 -0.039 20-year bond 94-152/256 3.7633 -0.082 30-year bond 90-168/256 3.5069 -0.074 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 41.25 3.25 spread U.S. 3-year dollar swap 20.00 2.00 spread U.S. 5-year dollar swap 9.75 1.00 spread U.S. 10-year dollar swap 6.75 0.25 spread U.S. 30-year dollar swap -30.75 0.00 spread (Additional reporting by Michelle Price in Washington; editing by Jonathan Oatis and Sam Holmes)