Yields near six-week lows, Fed hawkishness in question

NEW YORK, May 27 (Reuters) – US Treasury yields ended near six-week lows on Friday as concerns about growth and signs that inflation may have peaked led investors to speculate that the Federal Reserve may not raise rates as much as previously expected.

Benchmark 10-year yields have dropped from 3-1/2 year highs reached earlier this month on concerns that the US central bank’s aggressive rate hikes could tip the economy into recession.

Now, those fears have also increased speculation that the Fed could pivot to a more dovish stance if the economy cools.

“That’s been this week’s story … people questioning how high the terminal rate will ultimately be, but I think it’s still going to be too soon to say with any high conviction just given the fact that we’re going to need to see more inflation data,” said Benjamin Jeffery, interest rate strategist at BMO Capital Markets in New York.

Fed funds futures traders are pricing in 50 basis point hikes at each of the Fed’s June and July meetings, and a chance of a similar move in September.

They have pared their expectations on how high the Fed will ultimately raise its benchmark rate, with the federal funds rate now expected to be at 2.89% in March, compared with expectations on Monday of 3.03%. It is currently at 0.83%.

Benchmark 10-year note yields fell two basis points to 2.743%. They are holding just above a six-week low of 2.706% reached on Thursday and are down from 3.203% on May 9.

The yield curve between two-year and 10-year notes flattened one basis point to 26 basis points.

Yields briefly bounced after data showed that inflation eased in April, boosting hopes that the economy will suffer less damage if the worst of soaring price pressures have passed.

The personal consumption expenditures (PCE) price index gained 0.2% last month after shooting up 0.9% in March. In the 12 months through April, the PCE price index advanced 6.3% after jumping 6.6% in March.

US consumer spending also rose more than expected in April as households boosted purchases of goods and services, which could underpin economic growth in the second quarter.

Jobs data for May released next Friday is the next major US economic focus. It is expected to show that employers added 320,000 jobs during the month, according to the median estimate of economists polled by Reuters.

(Reporting by Karen Brettell; Editing by Nick Zieminski)