(Adds analyst comment, updates prices) * U.S. two-year yield hits highest since early July * U.S. two-year note auction shows strong results * U.S. five-year sale shows mixed outcome By Gertrude Chavez-Dreyfuss NEW YORK, Aug 28 (Reuters) – U.S. Treasury yields were modestly lower on Monday, pulling back from their highs last week, as investors awaited key U.S. economic data, led by the non-farm payrolls report for August on Friday that should help determine the path of interest rates this year and next. U.S. two-year yields earlier in the session rose as high as 5.106%, the strongest level since July 6, with market participants pricing in higher interest rates to contain persistently elevated inflation. The rate move was in line with Federal Reserve Chair Jerome Powell’s hawkish message on Friday. The two-year yield, which reflects interest rate expectations, was last down 1.7 basis points (bps) at 5.039%. Volume was thin overall with most market participants out ahead of the Labor Day weekend, and with Monday’s holiday in the UK. “At the end of the day, now that Jackson Hole is behind us, Jerome Powell’s message is consistent in the sense that economic data will pave the way for future monetary policy,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania. Powell, in remarks at the annual Jackson Hole Economic Policy Symposium on Friday, said the U.S. central bank may need to raise interest rates further to cool still-too-high inflation. But he promised the Fed would move carefully, noting both progress on easing price pressures and risks from the surprising strength of the U.S. economy. Monday’s auctions by the U.S. Treasury were mixed, with the $45 billion two-year note sale garnering more demand than the $46 billion five-year offering. The two-year notes fetched a high yield of 5.024%, the highest in 17 years. That was lower than the expected rate at the bid deadline, suggesting investors were willing to accept a lower rate for the note and meant increased demand. The U.S. five-year note auction was not as strong, analysts said, picking up a high yield of 4.4%, matching expectations. The high yield was the highest since late 2007. The country’s debt managers will next sell $36 billion in seven-year notes on Tuesday. The yield curve, as measured by the gap between U.S. two-year and 10-year yields, reduced its inversion after the auctions. The curve, which historically predicts recession, was last at -83.70 bps. Earlier on Monday, the curve inverted to as much as -88.20 bps, matching the spread hit on Aug. 10. The added inversion reflected expectations of more interest rate hikes. Markets anticipate an 80% chance of the Fed’s standing pat next month, Refinitiv’s FedWatch tool showed, but the probability of a rate hike in November is now seen at roughly 56%. In midafternoon trading, the yield on the benchmark 10-year note was down 3.7 bps at 4.202%. “We may see the 10-year Treasury yield above what we deem as fair value in the near term despite cooling inflation, before eventually settling back down in the mid-to-high threes if our forecast is right,” wrote LPL Financial in a research note led by chief fixed income strategist Lawrence Gillum. “A Fed pause is increasingly likely in September, which should help send rates down and prop up core bond returns.” U.S. 30-year yields were also lower, down 1.4 bps at 4.281%. August 28 Monday 3:30PM New York / 1930 GMT Price Current Net Yield % Change (bps) Three-month bills 5.3425 5.5026 0.018 Six-month bills 5.35 5.5708 -0.003 Two-year note 99-121/256 5.0392 -0.017 Three-year note 99-32/256 4.6942 -0.032 Five-year note 98-202/256 4.4007 -0.032 Seven-year note 98-18/256 4.3251 -0.040 10-year note 97-88/256 4.2039 -0.035 20-year bond 98-148/256 4.4834 -0.022 30-year bond 97-96/256 4.2812 -0.014 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler and Marguerita Choy)
