CASH-T-bill yields have hovered as Fed cuts bond purchases “soon”

 (Adds remarks, new record in reverse repo facility)
    By Herbert Lash
    NEW YORK, Sept 22 - U.S. Treasury yields see-sawed on Wednesday after the
Federal Reserve said it would reduce its monthly bond purchases "soon" and
investors grappled with a timeline that suggested higher interest rates may
follow more quickly than expected.
    In the Fed's economic projections and policy statement, nine of the U.S.
central bank's 18 policymakers projected borrowing costs will need to rise next
year. Analysts said the moves represented a hawkish tilt with a November taper
announcement most likely. 
    After a bit of nerves over Fed Chair Jerome Powell's remark that the
tapering of bond purchases will end in the middle of next year, the market
decided to take that hawkish pace in stride, said Lee Ferridge, North American
head of multi-asset strategy at State Street Global Markets in Boston.
    "This was a more hawkish message from the Fed, but it's a future hawkish
message. It's not a hawkish message today. We didn't start to taper," he said.
    Yields on the 10-year Treasury note had a more nuanced move than stocks,
which rose in a risk-on rally, Ferridge said. Without a visible rate hike in the
near future, yields didn't need to move higher, he said.
    The yield on 10-year Treasury notes fell, rose and fell again in
choppy trade. The benchmark note was last down 2 basis points at 1.304%, while
yields at the longer end fell further.
    After the statement from the Federal Open Market Committee (FOMC), the Fed
funds market fully priced in a rate hike by January 2023, moving projected rate
hikes forward by a month. 
    The Fed indicated it sees inflation running this year at 4.2%, more than
double its target rate.
    Joseph LaVorgna, chief economist for the Americas at Natixis, said Powell
and other key policymakers are considered dovish, casting doubt on the hawkish
stance suggested in the economic projections and Powell's remarks.
    "I don't think the Fed's tightening is going to be anywhere near as hawkish
as they anticipate. It's going to be hard for them to execute on this plan as
the economy slows next year," LaVorgna said.
    Yields earlier held steady as fears of imminent contagion from China
Evergrande receded. The People's Bank of China injected 90 billion yuan into the
banking system, soothing fears of financial fallout from a default by the
debt-laden Chinese property developer.
    The Fed's reverse repo facility, which offers approved money managers the
option to lend money overnight to the U.S. central bank in return for Treasury
collateral, set a record $1.283 trillion on Wednesday. 
    The FOMC during its meeting raised the counterparty limit in overnight
reverse repurchase agreements to $160 billion effective Sept. 23, from the
current $80 billion, the New York Federal Reserve said in a statement.

    The financial system is awash in trillions of dollars of bank reserves,
which are rising in part because of the Fed's asset purchases, a drop in
Treasury issuance and a drawdown in the government's store of funds at the Fed.
    The gap between five-year notes and 30-year bonds fell below
100 basis points after the Fed statement to its lowest level since July 2020. A
narrower gap is a possible indicator of factors like economic uncertainty,
easing inflation concerns and anticipation of tighter monetary policy.  
    The market consensus had expected the Fed as early as November to begin to
reduce its Treasury purchases by $10 billion a month and mortgage-backed
security purchases by $5 billion a month. 
    A closely watched part of the U.S. Treasury yield curve measuring the gap
between yields on two- and 10-year Treasury notes, seen as an
indicator of economic expectations, was at 106.2 basis points. 
    The two-year U.S. Treasury yield, which typically moves in step
with interest rate expectations, was up 2.4 basis points at 0.240%. 
    The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities
(TIPS) was last at 2.429%.
    The 10-year TIPS breakeven rate was last at 2.277%, indicating
the market sees inflation averaging about 2.3% a year for the next decade.
    September 22 Wednesday 4:44PM New York / 2044 GMT
                               Price                                                             Current   Net
                                                                                                 Yield %   Change (bps)
 Three-month bills             0.0325                                                            0.033     0.008
 Six-month bills               0.0425                                                            0.0431    -0.003
 Two-year note                 99-199/256                                                        0.2403    0.024
 Three-year note               99-170/256                                                        0.4888    0.037
 Five-year note                99-128/256                                                        0.8536    0.025
 Seven-year note               100                                                               1.125     0.002
 10-year note                  99-128/256                                                        1.304     -0.020
 20-year bond                  99-224/256                                                        1.7574    -0.049
 30-year bond                  104-80/256                                                        1.8125    -0.044 DOLLAR SWAP SPREADS Last (bps)                                                        Net Change (bps)     
 U.S. 2-year dollar swap        11.25                                                              0.00    
 spread U.S. 3-year dollar swap        12.00                                                              0.00    
 spread U.S. 5-year dollar swap        10.25                                                              0.00    
 spread U.S. 10-year dollar swap        2.50                                                              0.25    
 spread U.S. 30-year dollar swap      -24.25                                                              0.50    
 spread (Reporting by Herbert Lash, additional reporting by Gertrude Chavez-Dreyfuss in
New York and Karen Pierog in Chicago; Editing by Will Dunham, Leslie Adler and
Sonya Hepinstall)

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