US yields slide as views on Fed rate hikes deemed too aggressive

NEW YORK: Treasury yields fell on Tuesday, led by the so-called belly of the curve, on investor views that market pricing based on an earlier-than-expected tightening by the Federal Reserve was too aggressive.

US 5-year notes led the decline in yields, falling nearly five basis points to 0.896% after hitting 14-month highs on Monday. Seven-year yields also fell, down four basis points, at 1.363%.

Investors' trading of 5-year notes typically reflects their views on interest rate expectations, analysts said.

"There's an overshoot in the belly of the curve and now it's reacting to the rate hike pricing," said Steve Feiss, managing director, fixed income at broker-dealer Etico Partners. "The 5-year is just on everybody's minds these days. It's just beyond the Fed dots."

Fed officials' median projection on the number of rate moves is commonly referred to as its "dot-plot." At its March policy meeting, the Fed said it does not expect to raise interest rates until 2023.

However, eurodollar futures, the most liquid interest rate market, on Tuesday priced in a full Fed hike by December 2022, and two more rate increases in 2023 in the wake of March's blockbuster US non-farm payrolls and a US services index hitting an all-time high.

"You would expect that hiking sooner than thought would take the wind out of the growth sails and would be pretty friendly for the long end of the curve," Etico's Feiss said.

TD Securities and Barclays, following Friday's jobs number, have both recommended buying 5-year notes, citing a market mispricing of rate expectations.

"The bar for the Fed to hike rates remains high as the Fed needs to see an inflation overshoot and an inclusive labor market recovery," said TD's research note.

"This would require substantial labor market improvement over a longer period in our view. In addition, given the need for the Fed to complete tapering before hiking rates, which can take the better part of a year, we think the market is overpriced for a risk of an early Fed hike," TD added.

In mid-morning trading, the US 10-year Treasury yield was last down at 1.68%, from 1.72% on Monday.

US 30-year yields were down at 2.347%, from Monday's 2.363%.

On the short end of the curve, US 2-year yields slipped to 0.164%, from 0.174% on Monday.

The yield curve flattened on Tuesday after tightening the previous session. The spread between US 2-year and 10-year yields slid to 151.70 basis points.