TREASURIES-Yields lower as China data renews global economy concerns

By Davide Barbuscia NEW YORK, Aug 15 (Reuters) – U.S. Treasury yields were slightly lower on Monday as weak economic data from China renewed concerns over the health of the global economy, while the market continued to assess to what extent a slowdown in inflation could impact the U.S. Federal Reserve’s monetary tightening policies. In a surprise move, China’s central bank cut key lending rates on Monday to revive demand as data showed the economy slowed in July, with factory and retail activity impacted by Beijing’s zero-COVID policy and a property crisis. “China is the second biggest economy so if there’s a material slowdown there and China feels like it has to cut rates, that says something about the strength of the global economy,” said Steven Abrahams, senior managing director at Amherst Pierpont Securities. Benchmark 10-year Treasury yields were down to 2.793% from a 2.849% close last week. Two-year note yields fell to 3.2% from 3.257%. Data last week showed U.S. producer prices unexpectedly fell in July and the Consumer Price Index (CPI) for July was unchanged on the month, but up at an annual rate of 8.5%. This may suggest a peak in inflation increases and a slowdown in the Fed’s interest rate hikes, although many in the market remained skeptical and said more evidence of a slowdown in price pressure was needed. Fed funds futures traders are now pricing in a 63.5% chance of a 50-basis-point hike in September and a 36.5% chance of a 75-basis-point increase. They expect the fed funds rate to hit about 3.6% in March next year and decline after that. “Everybody is still trying to figure out where they think the Fed will go next year,” said Abrahams. “Our feeling is that the market continues to underestimate how high terminal Fed funds will go, so we’re expecting the yield curve to continue inverting pretty significantly,” he said, referring to the point were the federal funds rate will peak. The closely watched yield curve between two- and 10-year notes was at minus 42.4 basis points on Monday. It reached minus 56 basis points on Wednesday last week, the deepest inversion since 2000. An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12-18 months. August 15 Monday 9:29AM New York / 1329 GMT Price Current Net Yield % Change (bps) Three-month bills 2.5075 2.5576 -0.005 Six-month bills 2.9675 3.0533 -0.014 Two-year note 99-162/256 3.1946 -0.062 Three-year note 100-2/256 3.1222 -0.072 Five-year note 99-84/256 2.8963 -0.081 Seven-year note 98-160/256 2.8441 -0.082 10-year note 99-200/256 2.7752 -0.074 20-year bond 99-104/256 3.2909 -0.047 30-year bond 98-152/256 3.0721 -0.046 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.75 0.75 spread U.S. 3-year dollar swap 12.50 0.50 spread U.S. 5-year dollar swap 4.25 0.00 spread U.S. 10-year dollar swap 4.25 -0.50 spread U.S. 30-year dollar swap -32.00 -0.75 spread (Reporting by Davide Barbuscia, editing by Ed Osmond)