U.S. yields fall as Fed’s Powell affirms slow rate hike pace starting December

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NEW YORK — U.S. Treasury yields

retreated across the board on Wednesday after trading higher for

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most of the session after Federal Reserve Chair Jerome Powell

struck a more dovish tone than the market expected, saying the

U.S. central bank could slow the pace of rate hikes as soon as

next month.

Fed funds futures on Wednesday raised the chances of a

50 basis-point hike at a policy meeting next month to 89% from

83% just before Powell’s comments. For the February meeting, the

rates market has factored in a 58% likelihood of another such

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rate hike.

The peak Fed funds rate slid after Powell’s comments to

4.95%, seen hitting in May next year. Before his remarks, that

peak rate was at 5.05%, expected at the June meeting.

Powell said

on Wednesday the U.S. central bank could ease the pace of

interest rate hikes “as soon as December” but warned that the

fight against inflation is far from over.

“Generally, the market seems to have priced in the worst of

it already and just sort of getting the event volatility out of

play is sort of helping risk assets,” said John Luke Tyner,

fixed income portfolio manager at Aptus Capital Advisors in

Fairhope, Alabama.

“This probably isn’t the response that Powell is looking

for, especially since the terminal rate is moving lower. If this

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was the message that Powell is trying to communicate, then this

is different from what he said in the last several meetings,” he

added.

In afternoon trading, the yield on 10-year Treasury notes

fell 5.2 basis points to 3.697%.

The yield on the 30-year Treasury bond slipped

1.3 bps to 3.792%.

A widely tracked part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes remained inverted at -72.7 bps, narrower

following the slew of data released earlier in the session. The

inversion of this curve typically precedes recession.

The two-year U.S. Treasury yield, which typically

moves in step with interest rate expectations, was down 4.3 bps

at 4.297%.

U.S. yields earlier rose after data showed the world’s

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largest economy grew more than expected in the third quarter,

reinforcing expectations that the Fed will continue to raise

interest rates well into next year, though at a slightly slower

pace.

Gross domestic product expanded at a 2.9% annualized rate in

the third quarter, according to the government’s second

estimate, higher than the preliminary number of 2.6%. The

economy had contracted at a 0.6% rate in the second quarter.

The second estimate was also higher than economists’

forecast of 2.7%, a Reuters poll showed.

The report followed U.S. private sector employment data,

which showed new jobs created rose less than expected in

November, giving the Fed some flexibility to ease the pace of

tightening.

U.S. private employment increased by 127,000 jobs in

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November, the ADP National Employment report showed. Economists

polled by Reuters had forecast private jobs increasing 200,000.

The ADP number briefly earlier weighed on U.S. Treasury

yields.

November 30 Wednesday 2:36PM New York / 1936 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.265 4.3714 -0.013

Six-month bills 4.5425 4.7138 -0.018

Two-year note 100-34/256 4.4297 -0.043

Three-year note 100-220/256 4.1872 -0.057

Five-year note 100-8/256 3.868 -0.054

Seven-year note 100-120/256 3.7981 -0.051

10-year note 103-104/256 3.7124 -0.036

20-year bond 99-232/256 4.0067 -0.008

30-year bond 103-84/256 3.8126 0.011

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 31.00 -0.25

spread

U.S. 3-year dollar swap 11.50 -0.50

spread

U.S. 5-year dollar swap 3.50 0.00

spread

U.S. 10-year dollar swap -4.25 0.25

spread

U.S. 30-year dollar swap -44.50 0.50

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick

Zieminski and Lisa Shumaker)