U.S. yields up after inflation data as investors await Fed meeting

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NEW YORK — U.S. Treasury yields were

higher on Friday after inflation data in Japan surprised on the

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upside and following the release of the Federal Reserve’s

favored inflation measure, the Personal Consumption Expenditures

(PCE) index, which was in line with expectations.

Government bond yields – which move inversely to prices –

have been rangebound over the past few days as investors await

clues on monetary policy from the Federal Reserve at its

interest rate-setting meeting next week.

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Fed Chair Jerome Powell’s comments will be “the biggest

macro wild card in the week ahead,” BMO Capital Markets rates

strategists Ian Lyngen and Benjamin Jeffery said in a note.

Price moves, meanwhile, have been mainly determined by

economic data which painted a mixed picture. Economic output

data on Thursday, as well as labor market figures, surprised on

the upside, showing strength in the U.S. economy despite the

swift rise in interest rates by the Fed last year, aimed at

curbing rampant inflation.

On the other hand, data released from the Commerce

Department on Friday showed consumer spending, which accounts

for more than two-thirds of U.S. economic activity, dropped 0.2%

last month.

On the inflation side, the so-called core PCE price index

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rose 4.4% on a year-on-year basis in December after increasing

4.7% in November. The Fed tracks the PCE price indexes for

monetary policy, and other inflation measures have also slowed

down significantly.

“The core PCE came in line with expectations and there was

no downside beat that we’ve become accustomed to with recent

(inflation) prints,” said Thomas Hayes, chairman and managing

member of New York-based Great Hill Capital.

Still, the improving inflation picture was underscored by

the University of Michigan survey on Friday showing consumers’

12-month inflation expectations dropped to a 21-month low of

3.9% in January.

For Paul Ashworth, chief North America economist at Capital

Economics, the slump in spending showed that the U.S. economy

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was on the verge of a recession.

“With higher interest rates evidently weighing heavily on

demand now, we expect core inflation to continue moderating this

year, which will eventually persuade the Fed to begin cutting

interest rates late this year,” he said in a note.

Traders of futures tied to the Fed’s policy rate kept bets

on Friday that the U.S. central bank will raise interest rates

just once more beyond next week’s widely expected quarter-point

hike before stopping. They were pricing for the benchmark rate

to peak at about 4.91% in June, before declining to 4.47% in

December.

Yields declined marginally immediately after the PCE data

but they pared losses and were higher on the day after data

overnight showed core consumer prices in Tokyo, a leading

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indicator of nationwide trends, rose 4.3% in January from a year

earlier, marking the fastest annual gain in nearly 42 years.

Benchmark 10-year yields were up about three

basis points at 3.518%. They went as high as 3.565% in intraday

trading, their highest in over a week. Two-year yields

rose to 4.207%.

Key parts of the yield curve remained deeply inverted,

reflecting concerns about an imminent recession. The two-year,

10-year curve was last at minus 69.1 basis

points, while the spread between three-month and 10-year yields

was at minus 116.1 basis points.

January 27 Friday 3:00PM New York / 2000 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.5625 4.6774 0.008

Six-month bills 4.6625 4.8388 0.006

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Two-year note 99-216/256 4.2073 0.029

Three-year note 99-232/256 3.9083 0.025

Five-year note 99-116/256 3.6206 0.033

Seven-year note 99-132/256 3.5788 0.036

10-year note 104-252/256 3.5182 0.027

20-year bond 103-72/256 3.7631 0.004

30-year bond 106-168/256 3.6322 0.004

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 28.00 0.25

spread

U.S. 3-year dollar swap 14.25 0.75

spread

U.S. 5-year dollar swap 6.00 0.00

spread

U.S. 10-year dollar swap -2.25 0.75

spread

U.S. 30-year dollar swap -37.50 0.75

spread

(Reporting by Davide Barbuscia; Editing by Raissa Kasolowsky,

Andrea Ricci and Nick Zieminski)