July 12, 2019 / 6:50 PM / 2 months ago

TREASURIES-Yield curve steeper, rate cut bets unmoved by inflation gain

 (Updates yields, table)
    By Kate Duguid
    NEW YORK, July 12 (Reuters) - The U.S. yield curve was
slightly steeper on Friday, with yields largely unmoved by
stronger-than-expected producer price data as market
expectations of an interest rate cut this month held firm. 
    U.S. producer prices rose slightly in June even as the cost
of energy and other goods dropped for a second straight month,
beating economists' expectations that prices would be unchanged.
 The Labor Department report comes on the heels of strong
consumer price data published on Thursday, suggesting overall
inflation could continue to rise moderately despite the gains in
consumer prices.
    Inflation has consistently undershot the Federal Reserve's
2% target and has been cited by the central bank as a risk as it
weighs cutting interest rates in July for the first time since
2008. But market expectations of a rate cut were not swayed by
the evidence of some inflationary pressure. 
    "The trend is what the (Fed) committee wants to see. But in
a week where we heard Chairman Powell basically say that the
very strong labor market data was a positive print and that's
it, one individual dataset will not sway or set the committee's
outlook going forward," said Michael Lorizio, senior fixed
income trader at Manulife Investment Management. "You probably
have to keep that in mind looking at the inflation data over
yesterday and today." 
    Fed Chairman Jerome Powell, in testimony to Congress on
Wednesday, set the stage for a rate cut this month, focusing
particularly on the threat the U.S.-China trade war poses to the
economy while highlighting broader global weakness. Powell
downplayed a strong June jobs report and dismissed claims that
the U.S. labor market is hot. 
    The Fed's policy-setting committee will next meet on July
30-31.
    The two-year Treasury note yield, which reflects
market sentiment about changes in interest rate policy, was down
about a basis point to 1.843%. The benchmark 10-year note yield
 fell less than the 2-year, down half a basis point
to 2.115%. The 30-year bond yield was up half a
basis point to 2.644%. 
    Expectations of a 50-basis-point interest-rate cut in July
rose modestly, to 23.5% from 19.9% on Thursday, according to CME
Group's FedWatch Tool. A 25-point cut has been fully priced in
by the market. 
    
    Friday, July 12, at 1435 EDT (1835 GMT):
                               Price                  
 US T BONDS SEP/d              153-18/32    1/32      
 10YR TNotes SE/d              127-16/256   3/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.105        2.1451    -0.012
 Six-month bills               2.0225       2.077     -0.006
 Two-year note                 99-148/256   1.8451    -0.007
 Three-year note               99-202/256   1.8226    -0.010
 Five-year note                99-116/256   1.8659    -0.010
 Seven-year note               99-86/256    1.9776    -0.010
 10-year note                  102-76/256   2.1149    -0.005
 30-year bond                  104-188/256  2.6445    0.006
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       26.80        -0.40     
 30-year vs 5-year yield       77.80        1.35      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         3.50        -0.75    
 spread                                               
 U.S. 3-year dollar swap         1.00        -0.25    
 spread                                               
 U.S. 5-year dollar swap        -1.25        -0.50    
 spread                                               
 U.S. 10-year dollar swap       -6.25        -1.00    
 spread                                               
 U.S. 30-year dollar swap      -34.75        -1.75    
 spread                                               
 

 (Reporting by Kate Duguid; Editing by Andrea Ricci and Leslie
Adler)
  
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