© Reuters. FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration/File Photo
By Karen Brettell
(Reuters) – Benchmark 10-year Treasury yields hit their highest level since 2011 on Monday and a key part of the yield curve inverted for the first time since April as investors braced for the prospect that the Federal Reserve’s attempts to stem soaring inflation will dent the economy.
Yields jumped after data on Friday showed that U.S. consumer prices accelerated in May as gasoline prices hit a record high and the cost of food soared, leading to the largest annual increase in nearly 40-1/2 years.
The Fed is expected to hike rates by 50 basis points when it concludes its two-day meeting on Wednesday, with traders now seeing a 75 basis point increase as having a 27% probability.
UBS strategist Rohan Khanna said hawkish European Central Bank communication alongside the inflation print “have completely shattered this idea that the Fed may not deliver 75 bps or that other central banks will move in a gradual pace”.
Investors are pricing in the likelihood that the Fed will hike rates higher than previously expected this cycle as it tackles stubbornly high prices pressures.
Fed funds futures traders now expect the Fed’s benchmark rate to rise to 3.88% by May, almost one percentage point higher than was expected last month, and up from 0.83% now.
Deutsche Bank (ETR:DBKGn) said it now sees rates peaking at 4.125% in mid-2023.
As the Fed tightens policy, nerves about an economic downturn are rising. The two-year, 10-year Treasury yield curve briefly inverted on Monday, a reliable indicator that a recession will following in one-to-two years.
Jim Vogel, an interest rate strategist at FHN Financial, however, said a recession is not currently priced into the market.
“There is a fear that the Fed or any central bank can tighten us into a global slump, but not an outright recession, elsewise the peak of the Treasury curve wouldn’t be the five-year, it would be the two-year,” Vogel said.
Two-year yields reached 3.250%, the highest since Dec. 2007. Five-year yields rose to 3.434%, the highest since July 2008, Benchmark 10-year yields hit 3.295%, the highest since April 2011.
The yield curve between two-year and 10-year notes inverted as far as two basis points, before rebounding to positive territory at seven basis points. The gap between two-year and five-year note yields remained positive at 19 basis points.
The curve between five-year and 30-year yields inverted by as much as 17 basis points, after reinverting on Friday for the first time since May 4.
Some Fedwatchers, meanwhile, are sceptical the U.S. central bank will move faster with rate hikes. Pictet Wealth Management’s senior economist Thomas Costerg noted, for instance, that most inflation drivers such as food and fuel remain outside central bankers’ control.
“Over the summer, they will be aware of growth data and housing which is starting to look more wobbly,” Costerg said.
June 13 Monday 9:57AM New York / 1357 GMT
Price Current Net
Yield % Change
Three-month bills 1.405 1.4293 0.066
Six-month bills 2.0775 2.1281 0.168
Two-year note 98-168/256 3.2119 0.163
Three-year note 98-136/256 3.3941 0.169
Five-year note 96-130/256 3.3956 0.143
Seven-year note 96-48/256 3.3688 0.129
10-year note 96-156/256 3.278 0.121
20-year bond 95-136/256 3.5651 0.115
30-year bond 91-224/256 3.3046 0.107
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 39.75 2.75
U.S. 3-year dollar swap 19.75 1.25
U.S. 5-year dollar swap 5.00 1.00
U.S. 10-year dollar swap 6.75 0.75
U.S. 30-year dollar swap -24.25 0.25
Oil Prices Fall amid Protests in China
Oil prices fell on Monday amid a general decline in investor appetite for risk amid information about the ongoing protests in China against vested restrictions.
The cost of January futures on Brent crude oil on London’s ICE Futures exchange was $81.31 per barrel on Monday, down $2.32 (2.77%) from the close of the previous session. At the close of trading on Friday, those contracts fell $1.71 per barrel to $83.63.
Oil prices decline – what’s going on in the market?
The price of WTI futures for January crude fell by $2.31 (3.03%) to $73.97 per barrel in electronic trading on the New York Mercantile Exchange (NYMEX). By closing of previous trades, the cost of these contracts decreased by $1.66 (2.1%) to $76.28 per barrel. Brent and WTI gained 4.6% and 4.8%, respectively, last week.
According to Bloomberg, protests were held in cities across the country, including the capital Beijing, as well as Shanghai, Xinjiang, and Wuhan, which was originally the epicenter of the COVID-19 spread.
That contributes to a stronger U.S. dollar, which reduces the attractiveness of investments in crude, and also raises the possibility of even more significant tightening of restrictions by Chinese authorities, the agency said.
“The outlook for the oil market remains unfavorable and the events of this weekend in China do not add to the positive,” notes Warren Patterson, who is in charge of commodities strategy at ING Groep NV in Singapore.
According to the forecast of analytical company Kpler, oil demand in China in the fourth quarter will decrease to 15.11 million barrels per day (bpd) compared to 15.82 million bpd a year earlier.
Earlier we reported that Russia will ban the sale of its oil to countries that have imposed a price ceiling.
Oil Russia ban news: Russia will ban the sale of its oil to countries that have imposed a price ceiling
Will Russia sell oil to Europe? The administration of President Vladimir Putin is preparing an order prohibiting Russian companies and any trader from buying Russian oil to sell raw materials to countries and companies that have imposed a price ceiling on Moscow. Bloomberg news agency wrote this, citing a report from sources.
“The Kremlin is preparing a presidential decree banning Russian companies and any traders buying national oil from selling it to anyone who participates in the price ceiling,” the publication wrote.
According to the newspaper’s interlocutors, this would prohibit any mention of the price ceiling in contracts for Russian crude, as well as transferring it to countries that have joined the price ceiling for the natural resource.
In the first half of September, the press service of the US Treasury Department said that the USA, together with its allies from G7 (Great Britain, Germany, Italy, Canada, France and Japan) and the European Union (EU) would impose a ban on marine transportation of Russian oil on December 5 and oil products – on February 5.
Earlier we reported that EU negotiations on limiting the prices of Russian oil reached a deadlock today.
EU talks on restrictions on Russian crude oil prices today stalled
Negotiations between the European Union countries about the “ceiling” of Russian crude oil prices today reached an impasse; Bloomberg reported, according to its sources.
Representatives of the bloc cannot reach an agreement on the ceiling price of Russian oil. According to the agency, the proposed European Commission limit of $65-70 per barrel, Poland and the Baltic countries believe “too generous,” while Greece and Malta, which is actively engaged in transporting fuel, do not want the limit to fall below $ 70. Recall that the Russian response to the oil price cap was negative. The Russian government has officially said that it will only sell oil at market prices.
“We are looking for ways to make this solution work and we are trying to find a common ground to implement it in a perfectly pragmatic and efficient way, while avoiding that it may cause excessive inconvenience to the European Union,” said German Chancellor Olaf Scholz.
Earlier, we reported that the SEC fined Goldman Sachs $4 million for non-compliance with ESG fund principles.
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