By Herbert Lash
NEW YORK (Reuters) – U.S. Treasury yields slipped from earlier highs on Friday after the Federal Reserve’s preferred inflation gauge rose more than expected in January, but the reaction was muted as uncertainty reigned due to Russia’s invasion of Ukraine.
The price index for personal consumption expenditures (PCE) increased 0.6% last month, one-tenth of a percent higher than December, while over the 12 months to January the PCE index rose 6.1%, the largest rise since February 1982.
The so-called core PCE price index shot up 5.2% year-on-year in January, up from 4.9% in the 12 months through December. January’s core number gain was the largest since April 1983.
Market interest rates normally would have gained on the higher data numbers, but a less risk-adverse mood was driving U.S. and European equity markets where major indices were mostly trading higher.
“These yields don’t seem to overlay well with the inflation picture. And the Fed being behind, it just seems like yields should be higher to me,” said David Petrosinelli, senior trader at InspereX in New York.
“Rates would be higher today if we hadn’t had the invasion, that’s for sure,” he said.
Before the data release, the yield on the 10-year Treasury note was trading about 3 basis points higher at 2.002%, the first time the benchmark was above the 2% mark since last week.
The yield on 10-year Treasury notes was last unchanged at 1.972%, but below 2%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 37.2 basis points.
The flattening of the yield curve indicates a slowdown or even recession lies ahead and suggests the Fed has been too slow as the U.S. central bank prepares to raise rates next month.
“This is a very early flattening,” Petrosinelli said. “This is a good indicator of a not soft landing, maybe a little bit of a harder landing.”
Money markets priced in a 22.5% probability of a 50-basis-point rate hike in March, up a bit from Thursday but much lower than before Russia’s assault on Ukraine.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 5.2 basis points at 1.598%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.995%.
The 10-year TIPS breakeven rate was last at 2.569%, indicating the market sees inflation averaging about that rate annually for the next decade.
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 2.403%.
(Reporting by Herbert Lash; editing by Jonathan Oatis)
