Investors are concerned about inflation, even Us yields are falling.
Treasury yields in the United States fell for the second day in a row on Wednesday, as the market remained concerned about the Federal Reserve’s ability to control inflation without plunging the economy into recession.
Fed Chairman Jerome Powell stated on Wednesday that there is a risk that the Fed’s interest rate hikes will slow the economy too much, but the greater risk is persistent inflation, which allows public expectations of prices to rise.
The labor market is “tremendously strong” and the economy can withstand the U.S. central bank’s monetary tightening plans, though there is no guarantee, Powell said at a European Central Bank conference.
Stan Shipley, fixed-income strategist at Evercore ISI, said markets will remain choppy as investors and traders read into the economic data what they want to see.
“We’re getting slower economic data, some sectors look to be in recession, other sectors look to be in pretty good shape,” he said. “Ultimately the Fed is going to take down inflation so that by the time we get into September and October, inflation data will start to be rolling over,” he said.
The yield on 10-year Treasury notes fell 4.9 basis points to 3.158%, while the two-year’s yield advanced 0.2 basis points to 3.126%.
The gap between the yields on the two- and 10-year notes , a commonly used metric for indicating a potential recession when rates at the short end are higher than the long end, flattened further to 3.1 basis points.
Rates in the middle of the curve already are inverted, with yields on the three-, five- and seven-year notes higher than the 10-year, at 3.209%, 3.228% and 3.237%, respectively.
There is a risk that U.S. businesses and households could see price pressures persisting for a long time and central banks must act resolutely to bring inflation down, Cleveland Federal Reserve President Loretta Mester said on Wednesday.
Mester told CNBC earlier that if economic conditions remain the same, she will push for a 75 basis point interest rate rise at the Fed’s next policy meeting on July 26-27.
The Fed raised its benchmark overnight interest rate two weeks ago by 75 basis points – its biggest increase since 1994 – to a range of 1.50% to 1.75%, and signaled its policy rate would rise to 3.4% by the end of this year.
The yield on the 30-year Treasury bond was down 4.5 basis points to 3.267%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.727%.
The 10-year TIPS breakeven rate was last at 2.455%, indicating the market sees inflation averaging about 2.5% a year for the next decade.
The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.449%.
Crude stocks in the United States are declining, while fuel inventories are increasing, according to the EIA.
The Energy Information Administration reported on Wednesday that crude stocks in the United States fell while gasoline and distillate inventories increased.
Crude inventories fell by 2.8 million barrels in the week ending June 24 to 415.6 million barrels, compared to a 569,000-barrel drop predicted by analysts in a Reuters poll.
Crude stocks at the Cushing, Oklahoma, delivery hub fell by 782,000 barrels in the last week, EIA said.
Refinery crude runs rose by 403,000 barrels per day in the last week, EIA said. Refinery utilization rates rose by 1 % points in the week.
U.S. gasoline stocks rose by 2.6 million barrels in the week to 221.6 million barrels, the EIA said, compared with analysts’ expectations in a Reuters poll for a 452,000-barrel drop.
Distillate stockpiles , which include diesel and heating oil, rose by 2.6 million barrels in the week to 112.4 million barrels, versus expectations for a 328,000-barrel rise, the EIA data showed.
Net U.S. crude imports fell last week by 36,000 barrels per day, EIA said.