June 14, 2017 / 8:05 PM / a month ago

TREASURIES-Yields rise slightly as traders doubt hawkish Fed outlook

5 Min Read

    * Fed raises interest rates for second time this year
    * Fed forecasts one more rate rise in 2017
    * Yields lower on day as traders see weak inflation
hindering Fed

 (Updates prices, adds comments)
    By Sam Forgione
    NEW YORK, June 14 (Reuters) - U.S. Treasury yields pared
declines but remained lower on Wednesday after the Federal
Reserve raised interest rates, announced it would begin cutting
its holdings of bonds and other securities this year, and
forecast one more rate hike in 2017. 
    The Fed's interest rate increase, following a two-day
meeting, marked its second this year. Interest rates are seen
rising one more time by the end of this year, according to the
median projection of the forecasts released with the Fed's
policy statement, in keeping with the previous forecast.

    Yields rose from earlier levels on the hawkish tone of the
statement and the U.S. yield curve flattened, with the
difference between short-dated two-year Treasury yields and
benchmark 10-year yields narrowing to a difference of 78.58
basis points, the smallest since Sept. 9.
    While the Fed indicated that a recent softening in inflation
was seen as transitory, long- and medium-dated yields remained
not far from their lowest levels since November touched earlier,
when weak Consumer Price Index and retail sales data for May
stoked doubts that the Fed would be able to hike rates in the
second half of 2017. 
    Shorter-dated yields also remained lower on the day as
traders doubted the Fed's hawkish outlook given the recent soft
inflation readings.
    The Labor Department said earlier Wednesday that its
Consumer Price Index (CPI) dipped 0.1 percent in May. The
so-called core CPI, which strips out food and energy costs,
increased 1.7 percent year-on-year, the smallest rise since May
2015. 
    "The market remains highly skeptical that the Fed is going
to be able to deliver just based upon underlying data," said
Mark Cabana, head of U.S. short rates strategy at Bank of
America Merrill Lynch in New York. 
    U.S. 10-year yields were last at 2.138 percent
after touching 2.103 percent earlier, their lowest since Nov.
10. U.S. 30-year yields were last at 2.780 percent
after touching their lowest since Nov. 9 of 2.765 earlier. 
    U.S. two- and three-year yields were last at 1.343 percent
and 1.476 percent, compared to 1.363 percent and 1.505 percent
late Tuesday, after tumbling to eight-day lows of 1.290 percent
and 1.417 earlier.
    "Most of the statement and the summary of economic
projections was somewhat hawkish," said Subadra Rajappa, head of
U.S. rates strategy at Societe Generale in New York. "The key
takeaway...is that it is really going to depend on the
trajectory of inflation."
    
      June 14 Wednesday 3:48PM New York / 1948 GMT
                               Price                  
 US T BONDS SEP7               155-20/32    1-19/32   
 10YR TNotes SEP7              126-232/256  0-136/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.995        1.0114    0.002
 Six-month bills               1.0975       1.119     -0.010
 Two-year note                 99-210/256   1.3432    -0.020
 Three-year note               100-20/256   1.4733    -0.032
 Five-year note                100-28/256   1.7268    -0.053
 Seven-year note               100-76/256   1.9541    -0.065
 10-year note                  102-28/256   2.1377    -0.069
 30-year bond                  104-112/256  2.7805    -0.082
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.00        -1.75    
 spread                                               
 U.S. 3-year dollar swap        16.50        -1.25    
 spread                                               
 U.S. 5-year dollar swap         8.25        -0.50    
 spread                                               
 U.S. 10-year dollar swap       -2.25         0.50    
 spread                                               
 U.S. 30-year dollar swap      -37.25         2.75    
 spread                                               
 

 (Reporting by Sam Forgione; Editing by Nick Zieminski and Diane
Craft)
  

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