TREASURIES-US yields mostly up as data keeps Fed on track to delay rate cuts

Credit: REUTERS/DADO RUVIC

U.S. jobless claims fall in latest week

U.S. business activity moderates in February

U.S. existing home sales rise to five-month high in January

Odds of June rate cut falls to 66% vs 75% on Wednesday

Fed's Jefferson says appropriate to cut rates later in the year

U.S. 30-year TIPS auction shows lackluster results

Adds new comments, bullets, 30-year TIPS auction results, Fed's Harker's comments, updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 22 (Reuters) - U.S. Treasury yields were mostly higher on Thursday in choppy trading after economic data showed the world's largest economy remained stable, reinforcing expectations that interest rate cuts by the Federal Reserve will be pushed out to June or later in the year.

Yields on the long end of the curve from U.S. 10-year notes were slightly lower on a week in which investors were hesitant to make big moves in the absence of major drivers.

In afternoon trading, the benchmark U.S. 10-year yield was flat at 4.325% US10YT=RR. U.S. 30-year bond yields slipped 3.2 basis points (bps) to 4.4599% US30YT=RR.

On the shorter end of the curve, U.S. two-year yields rose 5.9 bps to 4.712% US2YT=RR.

"Moves today in Treasuries have been confined to pretty narrow ranges," said Will Compernolle, macro strategist, at FHN Financial in New York. "It's a sign that developments today are not going to change the fundamental outlook."

Thursday's data showed initial jobless claims dropped 12,000 to a seasonally-adjusted 201,000 for the week ended Feb. 17, suggesting that the labor market remains tight.

That was followed by U.S. existing home sales increasing to a five-month high in January. U.S. home sales rose 3.1% last month to a seasonally-adjusted annual rate of 4.00 million units, the highest since last August, data showed.

The only blemish in the U.S. data picture was the moderation in February's U.S. business activity. S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, slipped to 51.4 this month from 52.0 in January.

FED OFFICIALS AFFIRM PATIENCE ON RATE CUTS

Fed speakers on Thursday, meanwhile, affirmed expectations that the U.S. central bank will take its time to cut rates.

Fed Vice Chair Philip Jefferson said he remained "cautiously optimistic" about the progress in bringing inflation back down to the 2% target, noting that it is likely appropriate to start cutting policy rates later this year.

Philadelphia Fed President Patrick Harker, for his part, said, the Fed may be in a position to cut rates. "But I would caution anyone from looking for it right now and right away," he added.

For 2024, futures traders have factored in at least three rate cuts of 25 bps each. Traders had factored in as much as five cuts a few weeks ago.

FHN's Compernolle believes the market overreacted to the hotter-than-expected U.S. consumer and producer prices data for January, which helped push out the start of the Fed's easing cycle.

He cited the breakeven rate on two-year year U.S. Treasury Inflation-Protected Securities (TIPS) US2YBEI=RR, which has risen about 50 bps since the beginning of the year. It was last at 2.47%, suggesting the market sees inflation averaging by that percentage for the next two years.

"There were a lot of seasonal adjustments and weather disruptions in January," Compernolle noted. "Once we see the February CPI, inflation expectations, as implied in the breakeven inflation rate, will come under better control and that will lower nominal yields. With that, the market might expect more rate cuts for the rest of the year."

Also on Wednesday, the U.S. Treasury sold $9 billion in 30-year Treasury Inflation-Protected Securities (TIPS) and the results were weaker than expected. The high yield was 2.2%, higher than the expected rate at the bid deadline, suggested that investors sought a premium to buy 30-year TIPS.

Analysts at Action Economics said demand for inflation protection has eased in recent months as price pressures have declined in the wake of the Fed's fairly hawkish stance on rates. Thursday's auction results reflected that.

US bond yields https://tmsnrt.rs/42WyLeP

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci and Marguerita Choy)

((gertrude.chavez@thomsonreuters.com; 646-301-4124; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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