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U.S. yields sink after data shows economy slowing as rate hikes start to bite

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NEW YORK — U.S. Treasury yields tumbled

on Friday after data showed signs of an economy slowing down as

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wages rose less than expected last month even though new jobs

increased more than anticipated, while the U.S. services sector

shrank for the first time in more than 2-1/2 years.

U.S. factory orders declined in November as well after

posting gains in the previous month, suggesting, analysts said,

that along with other pieces of economic data, past rate

increases by the Federal Reserve may be finally taking their

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toll on the economy.

Friday’s reports also reinforced expectations that the Fed

could be nearing a pause in its rate-hiking cycle.

U.S. yields across the curve mostly dropped to two-week lows

in the aftermath of the services sector and factory orders data.

A widely tracked part of the U.S. yield curve, measuring the

gap between yields on two- and 10-year Treasury notes

, lessened its inversion to -70 basis points

(bps). The inversion, which typically foreshadows recession,

went as deep as -79.20 bps right after the jobs report, the most

inverted in three weeks.

The narrowing of the curve inversion on Friday indicated

that investors are pricing in fewer rate hikes by the Fed.

Data showed that U.S. non-farm payrolls rose 223,000 last

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month. Economists polled by Reuters had forecast payrolls

increasing by 200,000 jobs.

Average hourly earnings rose 0.3% in December after 0.4% in

the prior month. That reduced the year-on-year increase in wages

to 4.6% from 4.8% in November.

“The bond market is anticipating that the Fed is getting

closer to the end game. But it’s not very clear where the Fed

winds up,” said Gregory Faranello, head of U.S. rates at

AmeriVet Securities in New York.

“The Fed still has work to do. They want to get to

around 5%. But the reality is the cost of funding at 5% — if

they hold it there and have the perseverance to hold it there —

will have implications for the market and inflation, which they

want to come down,” he added.

U.S. data also showed that the Institute for Supply

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Management’s (ISM) non-manufacturing index dropped to 49.6 last

month from 56.5 in November. It was the first time since May

2020 that the services reading fell below the 50 threshold,

which indicates contraction in the sector that accounts for more

than two-thirds of U.S. economic activity.

Paul Ashworth, chief North America economist, at Capital

Economics wrote in a note that the ISM data showed “more

evidence of disinflationary pressure but, unlike the employment

report, consistent with recession rather that a soft landing.”

U.S. factory orders also slumped, falling 1.8% in November

after gaining 0.4% in October.

In afternoon trading, U.S. 10-year yields slid

to two-week troughs of 3.551%. The yield was last down 16.6 bps

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at 3.556%.

U.S. 30-year yields also declined to a two-week low of

3.671%, last down 11.6 bps at 3.682%.

On the shorter-end of the curve, U.S. two-year yields also

stumbled to the lowest in two weeks of 4.245%. They last traded

down 19.9 bps at 4.253%.

The rate futures market has priced in 25-bps hikes at the

next two policy meetings. The peak fed funds rates is seen at

around 4.95%, expected to be reached at the June policy

gathering.

In other parts of the Treasuries market, U.S. breakeven

inflation rates were mostly lower, reversing earlier increases.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) slipped to

2.221%. The five-year breakeven rate meant that investors expect

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inflation, as measured by the consumer price index, to average

around 2.221% over the next five years.

The 10-year TIPS breakeven rate was last at

2.206%, down 2.1 bps.

January 6 Friday 3:48PM New York / 2048 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.5075 4.6204 -0.002

Six-month bills 4.65 4.8255 -0.023

Two-year note 99-252/256 4.2578 -0.195

Three-year note 100-8/256 3.9877 -0.214

Five-year note 100-194/256 3.7066 -0.204

Seven-year note 101-108/256 3.6422 -0.189

10-year note 104-168/256 3.5599 -0.162

20-year bond 102-12/256 3.8512 -0.121

30-year bond 105-192/256 3.6807 -0.117

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 29.50 1.25

spread

U.S. 3-year dollar swap 11.00 0.75

spread

U.S. 5-year dollar swap 0.25 -0.25

spread

U.S. 10-year dollar swap -6.00 -0.75

spread

U.S. 30-year dollar swap -46.75 -0.50

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by David Evans

and Andrea Ricci)

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