NEW YORK - U.S. Treasury yields fell for a third straight session on Friday, as investors remained concerned about growing signs of an economic slowdown even as the Federal Reserve vowed to stay aggressive with monetary tightening to stamp out persistently high inflation.
"Concerns over slowing growth are taking hold with more analysts warning of not just stagflation, but recession," said Kim Rupert, managing director, fixed income at Action Economics in San Francisco.
"The hits to margins that have been seen in Target, Walmart, and the like, due to rising costs of labor, materials, energy, and transportation are seen as potential harbingers of the worrisome future ahead," she added.
Fed funds futures were firmer, suggesting that the U.S. rate market has pulled back a bit from some of its more extreme rate hike estimates on the view that the Federal Reserve may have to scale back on its tightening plan, involving multiple 50 basis-point increases, as the economy slows down.
The rates market on Friday had priced in a fed funds rate of 2.783% at the end of next year, compared with the current level of 0.83%. That was as high as 2.9% two weeks ago. BofA Securities, in its latest research note, said there had been a "market sea change in rate views" over the last two weeks. It reaffirmed its call last month of going long duration when the 10-year yield was between 2.8%-2.85%.
The U.S. bank cited several factors such as yields having overshot fundamentals, Fed pricing looking full, growth and inflation easing and signs of an economic slowdown in surveys. In mid-morning trading, the benchmark U.S. 10-year yield slipped 2.2 basis points to 2.833%. The 30-year yield fell as well, dipping 2.4 bps to 3.041% . On the front end of the curve, U.S. two-year yields were little changed at 2.613%. The yield curve flattened again on Friday, with the spread between U.S. two- and 10-year yields narrowing to 21.2 bps. It has flattened in the four of the last five sessions.
"The curve flattening dynamic should persist until the Fed pivots dovish driven by early signs of softening employment & a higher unemployment rate," BoFA wrote in its note.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alison Williams)