July 12, 2019 / 4:28 PM / 3 months ago

TREASURIES-Yield curve steeper, rate cut bets unmoved by inflation gain

 (Updates to reflect movement in yields)
    By Kate Duguid
    NEW YORK, July 12 (Reuters) - The U.S. yield curve was
slightly steeper on Friday, with yields largely unmoved by
stronger-than-expected producer price data as market
expectations of an interest rate cut in July held firm. 
    U.S. producer prices rose slightly in June even as the cost
of energy and other goods dropped for a second straight month,
beating economists' expectations that prices would be unchanged.
 The Labor Department report comes on the heels of strong
consumer price data published on Thursday, suggesting overall
inflation could continue to rise moderately despite the gains in
consumer prices.
    Inflation has consistently undershot the Fed's target and
has been cited by the central bank as a risk as it weighs
cutting interest rates in July for the first time since 2008.
But market expectations of a rate cut were not swayed by the
evidence of some inflationary pressure. 
    "The trend is what the committee wants to see. But in a week
where we heard (Fed) Chairman (Jerome) Powell basically say that
the very strong labor market data was a positive print and
that's it, one individual dataset will not sway or set the
committee's outlook going forward," said Michael Lorizio, senior
fixed income trader at Manulife Investment Management.
    "You probably have to keep that in mind looking at the
inflation data over yesterday and today." 
    Powell on Wednesday delivered testimony to Congress in which
he set the stage for a rate cut this month, focusing
particularly on the threat the U.S.-China trade war poses to the
economy, while highlighting broader global weakness. Powell also
downplayed a strong June jobs report and dismissed claims that
the U.S. labor market is hot. 
    The two-year Treasury note yield, which reflects
market sentiment about changes in interest rate policy, was down
less than a basis point to 1.847%. Longer-dated maturities
gained, with the benchmark 10-year note yield up
half a basis point to 2.125%, and the 30-year bond yield
 up 1.4 basis points to 2.653%. 
    Expectations of a 50-basis point interest-rate cut in July
rose modestly, up to 24.5% from 19.9% on Thursday, according to
CME Group's FedWatch Tool. A 25-point cut has been fully priced
in by the market. 
    "The market reaction is probably what one would expect on a
beat, which is minor bearish pressure and not much more," said
      July 12 Friday 12:02PM New York / 1602 GMT
 US T BONDS SEP/d              153-11/32    -6/32     
 10YR TNotes SE/d              127          1/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.105        2.1451    -0.012
 Six-month bills               2.025        2.0796    -0.003
 Two-year note                 99-147/256   1.8471    -0.005
 Three-year note               99-196/256   1.8307    -0.002
 Five-year note                99-106/256   1.8742    -0.002
 Seven-year note               99-68/256    1.9885    0.000
 10-year note                  102-52/256   2.1254    0.005
 30-year bond                  104-144/256  2.6526    0.014
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       27.70        0.45      
 30-year vs 5-year yield       77.70        1.30      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         4.25         0.00    
 U.S. 3-year dollar swap         1.25         0.00    
 U.S. 5-year dollar swap        -0.75         0.00    
 U.S. 10-year dollar swap       -5.50        -0.25    
 U.S. 30-year dollar swap      -34.00        -1.00    

 (Reporting by Kate Duguid; Editing by Dan Grebler and Andrea
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