U.S. yields ease after Tuesday’s Powell-fueled rise; soft housing data weighs

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NEW YORK — U.S. Treasury yields slid in

choppy trading on Wednesday, tracking losses on Wall Street,

after poor U.S. housing data added to growing slowdown concerns

as a result of aggressive monetary tightening by the Federal

Reserve.

That said, a steep path for U.S. interest rates remained the

prevailing market consensus.

U.S. benchmark 10-year yields hit one-week highs of 3.015%

amid ultra-hawkish comments from Fed Chair Jerome Powell on

Tuesday. But the yield fell below 3% after a soft U.S. housing

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starts number.

Powell said on Tuesday the Fed would push interest rates as

high as needed to stem a surge in inflation that he said

threatened the foundation of the economy.

“If that involves moving past broadly understood levels of

‘neutral’ we won’t hesitate to do that,” Powell said at a Wall

Street Journal event, referring to the rate at which economic

activity is neither stimulated nor constrained.

Jim Vogel, in a research note on Wednesday, wrote that the

Fed Chair is using interviews to get across a “tough, inflation

fighting profile.”

Powell’s reminders about inflation “did not change 2022

expectations for policy yesterday.” Instead, they “accelerated

implied increases in 2023 and extended them throughout next

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year.”

Interest rate futures have priced in a fed funds rate of

2.82% at the end of this year, and nearly 200 basis points in

cumulative hikes.

The fall in U.S. housing starts and building permits amid

rising mortgage rates pressured Treasury yields as stocks fell.

Housing starts slipped 0.2% to a seasonally adjusted annual

rate of 1.724 million units last month, while the data for March

was revised lower to a rate of 1.728 million units from the

previously reported 1.793 million units.

At the same time, permits for future homebuilding dropped

3.2% to a rate of 1.819 million units.

“We see significant further downside for housing demand and

for single-family building, confirmed by last week’s sharp

decline in mortgage purchase applications,” said Jefferies in a

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research note whose contributors included chief economist Aneta

Markowska.

“It’s doubtful that the multi-family sector will be able to

fully offset those projected declines. Net, it’s still likely

that overall housing starts will drift lower in the next three

to six months.”

In midmorning trading, 10-year yields slipped less than 2

basis points to 2.947, while the 30-year bond yield

was down 2.6 basis points at 3.138%.

On the front end of the curve, U.S. two-year yields, which

are sensitive to Fed rate expectations, were down less than a

basis point at 2.696%.

The yield curve has further flattened, with the spread

between U.S. two- and 10-year yields narrowing to 25.4 basis

points.

May 18 Wednesday 10:12AM New York / 1412 GMT

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Price Current Net

Yield % Change

(bps)

Three-month bills 1.035 1.0521 -0.018

Six-month bills 1.5125 1.5453 -0.003

Two-year note 99-161/256 2.6964 -0.002

Three-year note 99-164/256 2.8763 -0.006

Five-year note 99-36/256 2.9377 -0.008

Seven-year note 99-96/256 2.9751 -0.020

10-year note 99-92/256 2.9495 -0.020

20-year bond 86-8/256 3.3474 -0.024

30-year bond 94-228/256 3.1392 -0.025

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 27.25 -0.25

spread

U.S. 3-year dollar swap 12.75 0.50

spread

U.S. 5-year dollar swap 3.00 0.00

spread

U.S. 10-year dollar swap 5.75 -0.25

spread

U.S. 30-year dollar swap -26.75 -0.75

spread

(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan

Oatis)