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TREASURIES-U.S. yields lower as growth concerns weigh on markets ahead of Fed

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By Davide Barbuscia NEW YORK, Jan 25 (Reuters) – U.S. Treasury yields were down in morning trade on Wednesday, reflecting concerns about an economic slowdown ahead of the Federal Reserve’s interest rate-setting meeting next week. The Fed raised its benchmark overnight rate by 4.25 percentage points last year to fight decades-high inflation, but the rapid tightening of monetary policy – the fastest since the 1980s – has led investors to weigh inflation concerns against recessionary fears, with markets fluctuating between the two. After a series of supersized rate hikes last year, the U.S. central bank is now largely expected to raise rates by a smaller 25 basis points next week after signs that inflation is cooling off. The prospect of a slower tightening pace has recently reinforced some expectations of a so-called soft landing – a scenario in which inflation eases against a backdrop of weakening but resilient economic growth. But fears of an upcoming economic contraction were affecting markets on Wednesday, with a bleak revenue guidance from Microsoft Corp on Tuesday weighing on sentiment for growth stocks, and with investors focused on corporate earnings reports to assess the impact of the Fed’s hikes and gauge whether recent enthusiasm for such stocks will be sustained. Meanwhile, inflation data from other countries such as Australia, where price pressures rose to a 33-year peak of 7.8% last quarter, signaled global central banks might need to keep hiking interest rates for longer, dampening a recent wave of optimism that aggressive monetary tightening was almost done. “It’s kind of a tug-of-war between central banks, which may not eventually be easing the way the markets are pricing, and the weaker growth data,” said Eric Theoret, global macro strategist at Manulife Investment Management. Benchmark 10-year government bond yields were down about 2 basis points to 3.441% on Wednesday and two-year note yields – which tend to more closely reflect monetary policy expectations – inched 1 point lower to 4.143%. A widely tracked part of the U.S. Treasury yield curve measuring the gap between those two maturities remained inverted at -70.5 basis points. The inversion of this curve has predicted eight of the last nine recessions, analysts have said. Later on Wednesday, the U.S. Treasury will auction $43 billion in five-year notes. In morning trade, five-year yields were at 3.552%, 3 basis points down from Tuesday. January 25 Wednesday 9:33AM New York / 1433 GMT Price Current Net Yield % Change (bps) Three-month bills 4.5725 4.6902 -0.005 Six-month bills 4.6675 4.8467 -0.010 Two-year note 99-247/256 4.1435 -0.010 Three-year note 100-24/256 3.8409 -0.022 Five-year note 101-114/256 3.5523 -0.030 Seven-year note 102-84/256 3.4934 -0.032 10-year note 105-164/256 3.4416 -0.025 20-year bond 103-248/256 3.7148 -0.024 30-year bond 107-52/256 3.6035 -0.018 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.00 5.25 spread U.S. 3-year dollar swap 14.25 0.25 spread U.S. 5-year dollar swap 4.25 0.50 spread U.S. 10-year dollar swap -3.25 1.25 spread U.S. 30-year dollar swap -39.00 1.75 spread (Reporting by Davide Barbuscia; editing by Jonathan Oatis)

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