Treasury yields in the United States are falling as market prices reduce inflation.
On Friday, U.S. Treasury yields fell, with the breakeven rate on longer-dated inflation-protected bonds falling to nine-month lows, on market expectations that elevated U.S. consumer prices will fall close to the Federal Reserve’s inflation target.
The yield on 10-year Treasury notes fell 17.9 basis points to 2.795 % , while the yield on two-year Treasury notes , which moves in lockstep with interest rate expectations, fell 19.4 basis points to 2.733 % . Both had reached four-week lows.
The breakeven rates on five- and 10-year Treasury Inflation-Protected Securities, or TIPS, slid to 2.583% and 2.325%, respectively to rates last seen in September 2021.
“The breakeven market, the difference between TIPS versus regular Treasuries, is dramatically downward sloping. It’s barely above the Fed’s long-term average target of 2%,” said Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC in Greenwich, Connecticut.
“The market is pricing that the Fed’s hiking rates is going to dramatically bring down future CPI inflation,” she said.
Uncertainty about when inflation will peak and how deep and long a likely recession will be is driving all security markets, whether credit or equities, said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.
“Central banks are saying the biggest threat out there is inflation and we’re going do whatever it takes to get that under control,” Mullarkey said. “That’s the message that the markets have priced into their securities. They’re saying ‘there’s a lot of risk, there’s a lot of volatility.'”
The gap between yields on two- and 10-year Treasury notes , seen as an indicator of a potential recession when the short end of the yield curve inverts and rises above the long end, was at 6.0 basis points.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.583%.
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 2.341%.
Construction spending in the United States fell in May, but residential construction increased.
US construction spending fell by 0.1% in May, compared with a 0.4% increase expected in a survey compiled by Bloomberg and following an upward revised 0.8% increase in April.
Private residential construction rose by 0.2%, though both single-family and multi-family construction were both flat, suggesting a gain in the unlisted renovation category.
Private nonresidential construction fell by 0.4%, while public construction declined by 0.8%.
Dollar boosted by safety bid on rising recession fears
On Friday, pessimism about the global economy boosted demand for the safe haven US dollar, while the Australian dollar, a proxy for global growth, fell to a two-year low.
Inflationary pressures and a rush by central banks to raise interest rates and stem the flow of cheap money have fueled market sell-offs and lifted assets perceived to be safer bets.
The dollar gained on Friday even as concerns about an economic downturn sent benchmark 10-year U.S. Treasury yields to one-month lows.
The greenback is being swayed between concerns that the Federal Reserve will continue to hike rates aggressively in an effort to blunt soaring price pressures, and the likelihood that this tightening will hurt the economy.
Expectations on how high the U.S. central bank will be able to raise rates have fallen, with traders now pricing in a peak rate of 3.33% in March, down from previous expectations of around 4% before the Fed’s June meeting. The Fed’s benchmark rate is currently 1.58%. (FEDWATCH)
The dollar index gained 0.63% against a basket of currencies to 105.39. It is holding just below a 20-year high of 105.79 reached on June 15.