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REFILE-TREASURIES-Yields dip after Powell says no Fed rate hike before recovery

·4-min read

(Adds last name Simons in paragraph 10) By David Randall NEW YORK, June 22 (Reuters) - Benchmark 10-year Treasuries yields inched lower on Tuesday as Federal Reserve Chairman Jerome Powell reiterated to Congress that the central bank will not raise interest rates until there are signs of a "broad and inclusive" recovery in the job market and economy. "We will not raise interest rates preemptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances," Powell said in a hearing before a U.S. House of Representatives panel. The yield curve - a measure of future economic expectations - had been narrowing since mid-May as investors bet the Fed will clamp down on inflation as the global economy rebounds from the coronavirus pandemic. The central bank surprised some market participants with its hawkish turn at its policy meeting last week. The spread between 5-year and 30-year Treasury yields rose to 123.90 basis points, a day after hitting a low of 107.80, while the spread between 2 and 10-year Treasury yields reached 123.86 basis points a day after touching its lowest levels since February. The 10-year yield eked down to 1.47% after touching 1.509% earlier in the day. Two-year yields, which are more sensitive to interest rate changes, dropped to 0.2362% while long duration 30-year bond yields edged down to 2.0967%. "Over the last week the Fed has definitely taken a more vigilant approach towards inflation, which is more in alignment with what the market was worried about and pricing in and that has soothed the market," making it unlikely that 10-year yields will rise much higher in the short-term, said Paula Solanes, senior portfolio manager at SVB Asset Management. The Fed last week signaled a potentially tougher stance on inflation and shifted projections for its first two rate hikes into 2023, sparking a selloff in U.S. stocks, boosting the dollar and flattening the Treasury yield curve in its fastest re-shaping since March 2020, according to Citi analysts. The Treasury market should remain volatile in the weeks ahead of the Fed's annual symposium at Jackson Hole, Wyoming in late August, analysts said. "There remains a degree of collective disbelief in the outright level of yields despite the Fed’s less dovish pivot and the implication for the forward path of policy rates," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. The Treasury Department auctioned $60 billion in 2-year notes Tuesday with a yield of 0.249%, a result that was largely in line with Wall Street expectations. The auction results point to continuing demand, which will likely mean that 2-year yields are near the bottom of a new trading range, said Thomas Simons, money market economist at Jefferies LLC. "There is still a lot of cash floating around in the front-end of the curve and although we may see 2s back up to the higher end of the range, downside is pretty limited," he noted. Meanwhile, the Federal Reserve's reverse repurchase window on Monday took in a record $$791.6 billion in cash from 74 counterparties, a sign investors see few attractive options available in a low-yield environment. Price Current Net Yield % Change (bps) Three-month bills 0.0425 0.0431 0.000 Six-month bills 0.05 0.0507 -0.005 Two-year note 99-201/256 0.2362 -0.018 Three-year note 99-110/256 0.443 -0.029 Five-year note 99-124/256 0.8569 -0.029 Seven-year note 100-58/256 1.2158 -0.020 10-year note 101-108/256 1.47 -0.015 20-year bond 103-164/256 2.0267 -0.012 30-year bond 106-40/256 2.0967 -0.009 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.00 1.00 spread U.S. 3-year dollar swap 8.50 1.00 spread U.S. 5-year dollar swap 6.25 1.00 spread U.S. 10-year dollar swap -3.75 0.50 spread U.S. 30-year dollar swap -34.00 -1.00 spread (Editing by David Gregorio)

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