Yield curve inverts further with inflation data in sight

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The yield curve inverted further on Friday as investors awaited key August inflation data due on Tuesday, and after the Federal Reserve chairman , Jerome Powell, reiterated that the priority of the US central bank is to deal with price increases.

* Yields rose after Powell’s comments on Thursday, led by notes more sensitive to short-term interest rates. However, benchmark 10-year yields are down from three-month highs on Tuesday, in part because of a deluge of corporate supply.

* “Powell … sounded like a hawk,” said Benjamin Jeffery, interest rate strategist at BMO Capital Markets in New York. “The most telling market reaction has been the flattening of the curve as we head into the weekend.”

* Powell said the Fed is “strongly committed” to reining in inflation, but there remains hope it can be done without the “soaring social costs” of other battles.

* Tuesday’s consumer price index (CPI) will be watched for any signs that price pressures may be easing. Prices are expected to rise at a rate of 8.1% in August, compared to 8.5% in July.

* The data will be released during a quiet period for Federal Reserve officials, which begins on Saturday. The Fed is expected to raise rates another 75 basis points at its September 20-21 meeting.

* Even if price pressures come in below expectations, analysts see the Fed as unlikely to deviate from the path it has taken.

* “Given that the Fed has told us it wants to take the data in its entirety, it’s hard to see a big enough disappointment in the CPI reading to rule out a 75 basis point hike in September,” Jeffery said.

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* The yield curve between 2-year and 10-year bonds widened 3 basis points to -23 basis points. Inversion is considered a reliable indicator of the probability of a recession in the next two years.

* Benchmark 10-year note yields were at 3.281%, after rising from a four-month low of 2.516% on August 2.

* Two-year yields were trading at 3,500%, down from 3,551% on Thursday, which was the highest since November 2007.

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