US yields slip after recent jump on strong data

NEW YORK, March 3 (Reuters) – Treasury yields slipped on Friday after hitting new highs this week as they met resistance following comments a day earlier from Federal Reserve officials that temporarily calmed fears around the direction of inflation and interest rates.

US government bond yields, which rise when prices fall, surged this week as strong US economic data and rising prices in Europe renewed concerns that central banks will need to raise rates more than expected to cool the economy and tame inflation.

Benchmark 10-year Treasury yields, as well as 30-year yields, rose above 4% for the first time since November, while yields on two-year notes hit levels not seen since 2007.

“Today is really about trading. The 10-year rose so much over the prior three to four days, most desks I talked to were short going into the weekend,” said Stan Shipley, strategist at Evercore SI in New York.

“They covered their shorts and got somewhat into a neutral position,” he said.

Bond bears met some resistance after Fed officials on Thursday expressed doubt on whether recent hotter-than-expected data was a “blip” or a sign that higher interest rates were required to slow price rises.

The market is trying to gauge how the Fed’s narrative of rates likely staying higher-for-longer will impact the US central bank’s economic projections.

Data on Friday showed the US services sector grew at a steady clip in February, with new orders and employment rising to more than one-year highs, suggesting the economy continued to expand in the first quarter.

The data is second-tier and had little impact on the Treasury market, Shipley said.

The yield on 10-year notes slid 10.6 basis points to 3.967%, while two-year yields, which are sensitive to interest rate expectations, fell 4.1 basis points to 4.863%.

The gap between two- and 10-year yields, seen as a recession harbinger when the shorter-dated notes are higher than the longer end, remained inverted at -89.8 basis points.

Money market expectations that the Fed may go back to a 50 basis-point hike in its policy rate at the end of a two-day meeting on March 22 gained traction earlier this week, though the consensus remained largely around a hike of 25 basis points.

US unemployment data on March 10 and the Consumer Price Index on March 14 will help determine the Fed’s next steps as it seeks to slow inflation to its 2% target. Fed Chair Jerome Powell’s testimony to Congress next week could also give some indications on the monetary policy outlook.

(Reporting by Davide Barbuscia and Herbert Lash in New York; Editing by Elaine Hardcastle and Matthew Lewis)