NEW YORK, Feb 15 (Reuters) - U.S. Treasury yields slipped on Thursday after sizable gains in recent sessions, as investors took a breather from selling bonds and readjusted positions to prepare for more inflation-related volatility, a scenario that could take yields even higher. U.S. benchmark 10-year yields, which move inversely to prices, earlier hit a fresh four-year high of 2.944 percent, before pulling back. So far this year, 10-year yields have climbed nearly 50 basis points. U.S. two-year yields, the maturity most sensitive to rate hike expectations, also came off from nine-year peaks. "The market is continuing to build a cushion against inflation volatility and further selling, whether the selling comes in the secondary markets or whether the selling comes from higher Treasury issuance," said Jim Vogel, interest rates strategist, at FTN Financial in Memphis, Tennessee. Tuesday's economic data had little impact on the Treasury market, but it did affirm the rising infation trend with gains in U.S. producer prices. Other reports such as the higher-than-expected Philadelphia Federal Reserve manufacturing index, also supported the economy's stable growth path.
Fed fund futures continue to price in a more than 80 percent chance the Fed will raise interest rates at next month's monetary policy meeting, and a 60 percent possibility of further tightening in June. "When we came into this year, the four-rate hike scenario was popular but not the consensus. Today, it's almost a full consensus," said Vogel. In mid-morning trading, U.S. benchmark 10-year Treasury note yields fell to 2.899 percent, from 2.913 percent late on Wednesday. Earlier in the session, 10-year yields hit a more than four-year peak of 2.944 percent. Investors braced for the 3-percent level on 10-year yields. Many in the market believe it's just a matter of time before it hits 3 percent, but Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets believes it will not stay there for long. "We're content to rely on the obvious parallels between the first quarter of 2018 and the Q1s of the last five years: the beginning of every year represents the point at which investors invariably hold the most ambitious growth and inflation assumptions," he added. That optimism, Lyngen, said is not likely to last. U.S. 30-year yields dropped to 3.123 percent from Wednesday's 3.177 percent. U.S. 2-year yields, meanwhile rose to 2.184 percent, compared with 2.172 percent on Wednesday. Two-year yields earlier hit a more than nine-year peak of 2.213 percent earlier in the session.
February 15 Thursday 10:46AM New York / 1546 GMT Price
US T BONDS MAR8 144-9/32 0-29/32 10YR TNotes MAR8 120-120/256 0-36/256 Price Current Net Yield % Change
Three-month bills 1.5625 1.5904 0.002 Six-month bills 1.78 1.821 0.018 Two-year note 99-166/256 2.1844 0.012 Three-year note 99-144/256 2.4021 0.005 Five-year note 98-202/256 2.6371 -0.003 Seven-year note 98 2.8185 -0.017 10-year note 98-204/256 2.8894 -0.024 30-year bond 97-156/256 3.1233 -0.054
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 27.00 -0.25
U.S. 3-year dollar swap 19.50 0.75
U.S. 5-year dollar swap 10.00 0.50
U.S. 10-year dollar swap 1.75 0.50
U.S. 30-year dollar swap -14.75 1.75
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrew Hay)