TREASURIES-Yields dip after Powell says no Fed rate hike before recovery

By David Randall
NEW YORK, June 22 (Reuters) - Benchmark 10-year Treasuries
yields inched lower on Tuesday as Federal Reserve Chairman
Jerome Powell reiterated to Congress that the central bank will
not raise interest rates until there are signs of a "broad and
inclusive" recovery in the job market and economy.
"We will not raise interest rates preemptively because we
fear the possible onset of inflation. We will wait for evidence
of actual inflation or other imbalances," Powell said in a
hearing before a U.S. House of Representatives panel.

The yield curve - a measure of future economic expectations
- had been narrowing since mid-May as investors bet the Fed will
clamp down on inflation as the global economy rebounds from the
coronavirus pandemic. The central bank surprised some market
participants with its hawkish turn at its policy meeting last
week.
The spread between 5-year and 30-year Treasury yields rose
to 123.90 basis points, a day after hitting a low of 107.80,
while the spread between 2 and 10-year Treasury yields reached
123.86 basis points a day after touching its lowest levels since
February.
The 10-year yield eked down to 1.47% after touching 1.509%
earlier in the day. Two-year yields, which are more sensitive to
interest rate changes, dropped to 0.2362% while long duration
30-year bond yields edged down to 2.0967%.
"Over the last week the Fed has definitely taken a more
vigilant approach towards inflation, which is more in alignment
with what the market was worried about and pricing in and that
has soothed the market," making it unlikely that 10-year yields
will rise much higher in the short-term, said Paula Solanes,
senior portfolio manager at SVB Asset Management.
The Fed last week signaled a potentially tougher stance on
inflation and shifted projections for its first two rate hikes
into 2023, sparking a selloff in U.S. stocks, boosting the
dollar and flattening the Treasury yield curve in its fastest
re-shaping since March 2020, according to Citi analysts.
The Treasury market should remain volatile in the weeks
ahead of the Fed's annual symposium at Jackson Hole, Wyoming in
late August, analysts said.
"There remains a degree of collective disbelief in the
outright level of yields despite the Fed’s less dovish pivot and
the implication for the forward path of policy rates," said Ian
Lyngen, head of U.S. rates strategy at BMO Capital Markets.
The Treasury Department auctioned $60 billion in 2-year
notes Tuesday with a yield of 0.249%, a result that was largely
in line with Wall Street expectations. The auction results point
to continuing demand, which will likely mean that 2-year yields
are near the bottom of a new trading range, said Thomas
money market economist at Jefferies LLC.
"There is still a lot of cash floating around in the
front-end of the curve and although we may see 2s back up to the
higher end of the range, downside is pretty limited," he noted.
Meanwhile, the Federal Reserve's reverse repurchase window
on Monday took in a record $$791.6 billion in cash from 74
counterparties, a sign investors see few attractive options
available in a low-yield environment.

Price Current Net
Yield % Change
(bps)
Three-month bills 0.0425 0.0431 0.000
Six-month bills 0.05 0.0507 -0.005
Two-year note 99-201/256 0.2362 -0.018
Three-year note 99-110/256 0.443 -0.029
Five-year note 99-124/256 0.8569 -0.029
Seven-year note 100-58/256 1.2158 -0.020
10-year note 101-108/256 1.47 -0.015
20-year bond 103-164/256 2.0267 -0.012
30-year bond 106-40/256 2.0967 -0.009

DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 7.00 1.00
spread
U.S. 3-year dollar swap 8.50 1.00
spread
U.S. 5-year dollar swap 6.25 1.00
spread
U.S. 10-year dollar swap -3.75 0.50
spread
U.S. 30-year dollar swap -34.00 -1.00
spread


(Editing by David Gregorio)