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Longer-term yields fall as CPI keeps Fed tightening expectations intact

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NEW YORK – Longer-term US Treasury yields fell on Wednesday after a reading of inflation was broadly in line with expectations and did not change views on the Federal Reserve’s policy trajectory.

The consumer price index rose 0.5% last month, just above the 0.4% expected, the Labor Department said on Wednesday. In the 12 months to December, the CPI jumped 7.0%, the biggest year-over-year increase since June 1982, but in line with forecasts by economists polled by Reuters.

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“This report does not pressure the Fed to step up its thinking on interest rates at this particular time,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.

“Markets should be happy with this as the inflation data is not as bad as what the markets predicted and would force markets to re-price an ever-increasing number of interest rate hikes throughout. from 2022. “

After initially rising immediately after the CPI data, the yield on 10-year Treasuries reversed course and fell 2.1 basis points to 1.725%.

The 10-year yield hit 1.808% on Monday, its highest since January 21, 2020.

Cleveland Fed Chairman Loretta Mester said on Wednesday central bank bond holdings should be reduced as quickly as possible without disrupting financial markets given the economy’s stronger position.

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The Fed’s “Beige Book” report said the economy had grown at a modest pace until the end of last year, with US companies saying supply chain disruptions and shortages of labor had hampered growth while the rise in prices was “solid”.

U.S. interest rate futures involved at least three rate hikes from the central bank in 2022 in the wake of CPI data. The market currently sees about an 80% chance of a rate hike of at least 25 basis points at its March meeting, according to the CME FedWatch Tool.

Even though some market participants are seeing Fed rates hike four times this year to fight rising prices, others believe US inflation may be nearing its peak.

Benchmark 10-year yields have fallen as more aggressive rate hikes are also seen as likely to hurt long-term growth and inflation. The yield reached 1.808% on Monday, its highest since January 21, 2020.

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The yield fell from its daily lows, however, following a $ 36 billion Treasury auction of 10-year bills, which analysts considered decent, with demand for above-average debt at 2.51 times the tickets on sale. .

The yield on 30-year Treasury bills fell 0.1 basis point to 2.071%.

The Treasury will sell $ 22 billion in 30-year bonds on Thursday.

A closely watched portion of the U.S. Treasury yield curve measuring the spread between two-year and ten-year Treasury bill yields, seen as an indicator of economic expectations, was 81.2 basis points after flattening at 80.8, the smallest difference since January 3. .

Short-term yields were higher, with the two-year US Treasury yield, generally moving in line with interest rate expectations, rising 1.2 basis points to 0.911%.

The breakeven rate on inflation-protected five-year US Treasuries (TIPS) was last at 2.87%, after closing at 2.92% on Tuesday.

The 10-year TIPS break-even rate was the latest at 2.525%, indicating that the market is forecasting average inflation of 2.5% per year over the next decade.

The 5-year US dollar inflation-linked forward swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was the latest at 2.401% . (Additional reporting by Reporting by Devik Jain in Bengaluru; editing by Jonathan Oatis and Nick Zieminski)

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