TREASURIES-US yields edge higher as retail data points to more Fed tightening


Band Davide Barbuscia

NEW YORK, Aug 16 (Reuters)US Treasury yields edged higher on Tuesday as encouraging data from American retail giants suggested the Federal Reserve has room to further tighten financial conditions as it battles four-decade high inflation.

Top US retailer Walmart WMT.N nudged up its annual profit forecast on Tuesday, while Home Depot HD.N surpassed estimates for quarterly sales.

“I think there’s an element of positivity out there from the Walmart numbers,” said Padhraic Garvey, global head of debt and rates strategy at ING Americas.

“I think there’s a feeling that this economy has got a bit of gas to it still, and while that’s a good thing what it means is that the Fed has got a job to do,” he said.

Benchmark 10-year Treasury yields US10YT=RR were at 2,862% from 2,791% on Monday, while two-year note yields US2YT=RR were at 3,232% from 3,203%.

The US central bank has raised its benchmark overnight interest rate by 225 basis points since March and is expected to raise its policy rate by another 50 or 75 basis points at its next meeting on Sept. 20-21.

The rapid tightening of financial conditions, however, has led investors to weigh inflation concerns against recessionary fears, with markets oscillating between the two narratives.

Data last week signaled a possible peak in inflation, and a report from the Commerce Department on Tuesday showed US homebuilding fell to the lowest level in nearly 1-1/2 years in July, weighed down by higher mortgage rates and prices for construction materials.

But many market participants remain skeptical and think more evidence of an economic slowdown and a decline in price pressures was needed for the Fed to ease its monetary tightening.

“There is continued uncertainty over the direction of policy and it may be too early to say that peak hawkishness is behind us,” Oxford Economics said in a research note.

For Garvey at ING, weaker housing data was not enough to suggest a slowdown in the Fed’s tightening path.

“Is that necessarily going to magically solve the stickiness of inflation? It certainly helps, but not necessarily,” he said.

“The Fed is far from done, and if that’s true we’re going to go through a period where bond yields are under rising pressure,” he added.

The similarly watched yield curve between two- and 10-year notes US2US10=TWEB – viewed as a reliable indicator that a recession will follow in 12 to 18 months – was at minus 37.5 basis points on Tuesday, up from minus 40 on Monday.

It reached minus 56 basis points on Wednesday last week, the deepest inversion since 2000.

August 16 Tuesday 10:02AM New York / 1402 GMT

price

Current Yield %

NetChange (bps)

three-month bills US3MT=RR

2,615

2.6692

0.005

six-month bills US6MT=RR

3.02

3.1094

0.002

two-year note US2YT=RR

99-144/256

3.2323

0.029

three-year note US3YT=RR

99-218/256

3.1773

0.044

five-year note US5YT=RR

98-254/256

2.9701

0.057

seven-year note US7YT=RR

98-28/256

2.9273

0.063

10-year note US10YT=RR

99-8/256

2.8621

0.071

20-year bond US20YT=RR

98-72/256

3.3697

0.058

30-year bond US30YT=RR

96-220/256

3.1629

0.066

DOLLAR SWAP SPREADS

Last (bps)

NetChange (bps)

US 2-year dollar swap spread

31.00

0.75

US 3-year dollar swap spread

11.75

0.00

US 5-year dollar swap spread

3.00

-0.25

US 10-year dollar swap spread

4.00

0.50

US 30-year dollar swap spread

-32.50

0.25

(Reporting by Davide Barbuscia; Editing by Paul Simao)

((Davide.Barbuscia@thomsonreuters.com; +1 917 285 3067; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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