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TREASURIES-Yields fall as Fed meets, but doesn't exceed, rate hike expectations

·3 min read

(Adds comments from Fed's Powell, quote, updates prices) By Karen Brettell NEW YORK, June 15 (Reuters) - U.S. Treasury yields fell on Wednesday after the Federal Reserve raised its target interest rate by three-quarters of a percentage point, meeting market expectations that have rapidly ratcheted higher following a stronger-than-expected inflation reading on Friday. The rate hike was the biggest made by the U.S. central bank since 1994. Fed Chair Jerome Powell said that an additional 50 or 75 basis points hike is likely in July, but added he doesn't expect 75 basis points increases to be common. “Things have moved really, really sharply in the couple of days leading up to the Fed, so it’s a little bit of a relief rally,” said Thomas Simons, a money market economist at Jefferies in New York. Some analysts and investors had speculated that the Fed might raise rates by 100 basis points or more on Wednesday. Two-year Treasury yields, which are highly sensitive to interest rate moves, fell to 3.237%, after reaching 3.456% on Tuesday, which was the highest since Nov. 2007. Benchmark 10-year yields dipped to 3.347%, after hitting 3.498% on Tuesday, the highest since April 2011. The closely watched yield curve between two-year and 10-year notes steepened to 9 basis points, after inverting by 5 basis points on Tuesday. An inversion in this part of the curve is seen as a reliable indicator that a recession is likely in one to two years. The Fed’s aggressive policy response is adding to concerns that the rate hikes could dent economic growth. Data on Wednesday showed that U.S. retail sales unexpectedly fell in May as motor vehicle purchases declined amid rampant shortages, and record high gasoline prices pulled spending away from other goods. Analysts at Barclays said on Wednesday that they expect the Fed to raise rates by only 50 basis points in July, citing “signs that consumption and the US housing market are slowing.” Falling inflation expectations also show some confidence that the Fed will succeed in taming rising price pressures. Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS), a measure of expected annual inflation for the next five years, have fallen to 3.03%, from around 3.17% on Friday. June 15 Wednesday 3:50PM New York / 1950 GMT Price Current Net Yield % Change (bps) Three-month bills 1.675 1.7055 -0.089 Six-month bills 2.22 2.2764 -0.120 Two-year note 98-157/256 3.2368 -0.198 Three-year note 98-142/256 3.3861 -0.207 Five-year note 96-112/256 3.4122 -0.186 Seven-year note 95-224/256 3.4212 -0.164 10-year note 96-12/256 3.3467 -0.136 20-year bond 94-124/256 3.6417 -0.075 30-year bond 90-136/256 3.3805 -0.051 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 36.50 1.25 spread U.S. 3-year dollar swap 16.25 0.50 spread U.S. 5-year dollar swap 3.75 -1.00 spread U.S. 10-year dollar swap 5.50 -1.50 spread U.S. 30-year dollar swap -29.25 -2.25 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)