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U.S. 10-year yield hits four-month low on weak data, Pelosi’s Taiwan visit

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NEW YORK — U.S. Treasury yields slid on

Monday in thin, choppy trading, with the benchmark 10-year yield

hitting a four-month low, as manufacturing and construction data

pointed to a slowdown that could prompt the Federal Reserve to

slow its interest rate increases.

U.S. House of Representatives Speaker Nancy Pelosi was set

to visit Taiwan https://www.reuters.com/world/asia-pacific/pelosi-begins-closely-watched-asia-tour-singapore-2022-08-01

on Tuesday, three people briefed on the matter said. That also

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spurred a flight-to-quality bid for Treasuries, analysts said.

China warned that its military would never “sit idly by” https://www.reuters.com/world/asia-pacific/china-warns-its-military-will-not-sit-idly-by-if-pelosi-visits-taiwan-2022-08-01

if she were to visit the self-ruled island claimed by Beijing.

Overall, U.S. yields have dropped off from overnight highs,

but the way Treasuries have traded since the Fed policy meeting

last week suggested that U.S. rates may have peaked for now as

the economy loses momentum.

Monday’s data showed U.S. manufacturing activity slowed less

than expected in July, with the Institute for Supply

Management’s (ISM) index of national factory activity dipping to

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52.8 last month, the lowest reading since June 2020.

U.S. construction spending also declined in June, down 1.1%,

as outlays on single-family homebuilding declined sharply amid

rising mortgage rates.

“U.S. rates are lower because the economy is slowing. The

tightening of financial conditions from the Federal Reserve,

which really started in late 2021, is starting to flow through

the broader economy,” said Gregory Faranello, head of U.S. rates

at AmeriVet Securities in New York.

“We can debate about recession or no recession. Anytime

there’s a question on recession, (Treasury Secretary Janet)

Yellen and (Fed Chair Jerome) Powell point to the employment

market. So I don’t think the Fed is finished raising rates yet,”

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he added.

The Fed last week delivered its second straight 75 basis

point rate increase, but Powell said the central bank could slow

the pace of its rate increases in the coming months if there is

evidence that tighter monetary policy is taming the worst U.S.

inflation in four decades.

Tom di Galoma, managing director, at Seaport Global Holdings

in Greenwich, Connecticut, said the market is underpricing how

aggressive the Fed will be in containing inflation.

“I know a lot of analysts saw a little bit more of a pivot

from where he (Powell) had been. I think the Fed has nothing

more but rate hikes in the future. I don’t think there’s any way

they can contain inflation,” he said.

In afternoon trading, the benchmark U.S. 10-year yield fell

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nearly 4 bps to 2.6073% after earlier dropping to

2.586%, the lowest since early April. Since hitting an 11-year

high of 3.4980% in mid-June, the 10-year yield has declined by

more than 90 bps.

The two-year U.S. Treasury yield, which typically

tracks interest rate expectations, was flat at 2.9126%.

A closely-watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes was inverted at -30.6 basis points.

An inversion of this yield curve typically foreshadows

recession.

U.S. 30-yields were down nearly 5 bps at 2.9286%

, after earlier sliding to 2.925, the lowest since

late May.

August 1 Monday 3:08PM New York / 1908 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 2.3125 2.3576 -0.015

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Six-month bills 2.83 2.9098 0.044

Two-year note 100-43/256 2.9126 0.016

Three-year note 100-120/256 2.833 0.008

Five-year note 100-92/256 2.6726 -0.022

Seven-year note 99-194/256 2.6632 -0.026

10-year note 102-72/256 2.6091 -0.033

20-year bond 101-228/256 3.121 -0.060

30-year bond 98-240/256 2.9286 -0.048

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 25.50 -0.50

spread

U.S. 3-year dollar swap 10.00 -0.50

spread

U.S. 5-year dollar swap 3.00 0.00

spread

U.S. 10-year dollar swap 5.50 -1.50

spread

U.S. 30-year dollar swap -29.50 -2.50

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Barbara

Lewis and Nick Zieminski)

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