NEW YORK - U.S. Treasury yields edged higher on Friday and held just above two-week lows reached on the previous day as investors weighed the likelihood that the Federal Reserve will spark an economic downturn as it aggressively hikes interest rates in a bid to stem soaring inflation.
Yields have dropped from more than decade highs reached before last week’s Fed meeting, when the U.S. central bank hiked rates by 75 basis points, the biggest increase since 1994, and signaled that a similar move is possible in July.
“It’s been a huge move lower really across the curve. ... It’s come down to some pricing out of central bank tightening,” said Zachary Griffiths, an interest rate strategist at Wells Fargo in Charlotte, North Carolina.
Fed funds futures traders have pared back expectations on how high the Fed is likely to raise its benchmark rate as concerns about an economic downturn increase. They are now pricing for the rate to rise to 3.49% by March, down from expectations last week that it would increase to around 4%. It is currently 1.58%.
Griffiths says inflation is unlikely to have peaked, however, which will likely keep the Fed on an aggressive rate hike path and keep shorter-dated yields elevated.
The next major catalyst for the market will likely be the release of the Personal Consumption Expenditures (PCE) price index next Thursday, which will be watched for further confirmation that price pressures remain heated.
“The focus on economic data at this point is going to be about as intense as it’s been in recent memory,” Griffiths said. Fed Chairman Jerome Powell said on Thursday that the Fed's commitment to reining in 40-year-high inflation is "unconditional" -- but also comes with the risk of higher unemployment.
Yields briefly dipped on Friday after data showed that consumer sentiment fell to a record low in June. Benchmark 10-year yields were last at 3.089%. They have fallen from 3.498% on June 14, the highest since April 2011.
Two-year Treasury yields were at 3.027%, down from 3.456% on June 14, which was the highest since November 2007. The closely watched yield curve between two-year and 10-year notes was at 6 basis points, after inverting early last week. An inversion in this part of the curve is seen as a reliable indicator that a recession is likely in one to two years.
(Reporting by Karen Brettell; editing by Jonathan Oatis)