TREASURIES-U.S. yield curve extends inversion as 100-bps rate hike bets mount

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* Fed fund futures price in 100 bps rate hike * Other yield curves invert as well * Recession signals by curve inversion no reliable -analyst * Fed's Waller says he backs a 75-bps hike this month (Adds new comment, Treasuries table, bylines, bullets, updates prices) By Gertrude Chavez-Dreyfuss and Saikat Chatterjee NEW YORK/LONDON, July 14 (Reuters) - A closely watched part of the U.S. Treasury yield curve on Thursday inverted to its lowest in more than two decades, as investors priced in a full percentage point interest rate hike by the Federal Reserve up following red-hot U.S. inflation data. The inversion on the U.S. two-year/10-year yield curve advanced further on Thursday to as much as 27.6 basis points (bps), the most since September 2000, Refinitiv data showed. Curve inversions typically precede recessions. The 2/10 inversions preceded the last eight recessions, including 10 of the last 13, analysts said. That said, Jim Vogel, senior rate strategist, at FHN Financial in Memphis, Tennessee pointed out that recession warnings signalled by the yield curve may not be reliable. "The Fed's inflation fight is the dominant curve feature and most of the time when the Fed tightens, it is fighting inflation in a very strong economy. And here we have high inflation and a sideways economy," Vogel said. "In that kind of environment, if you knew that coming in, that's an unusual pattern so all the previous history that the Fed tightens and the curve inverts and the inversion is a preview to recession may or may not apply," he added. Expectations that the Fed would hike by 100 bps at its July 26-27 meeting, more than the 75 bps priced in on Tuesday, came after a report showing the annual U.S. inflation rate hitting a more than 40-year peak in June. U.S. fed funds futures on Thursday priced in an 86% chance of a 100-bps hike at the Fed meeting later this month compared to around 7% on Tuesday before the inflation data, according to CME's FedWatch. Refinitiv's FedWatch, on the other hand, showed a lower probability, but still more than 50%. Fed Governor Christopher Waller said though on Thursday he supports another 75-bps rate increase at the Fed meeting later this month, but would lean toward a larger hike if incoming data shows demand is not slowing fast enough to bring inflation down. Also on Thursday, other parts of the U.S. yield curve inverted as well: the 2/5, 2/30, 5/10, and 5/30. Another key yield curve, the three-month/10-year flattened again on Thursday to 43.82 bps, the narrowest gap in a year, after steepening for most of this year. In late morning trading, yields on 10-year benchmark U.S. debt rose 6.5 bps to 2.974%, while yields on two-year debt, which are sensitive rate expectations, rose 7.7 bps to 3.217 Atlanta Federal Reserve Bank President Raphael Bostic on Wednesday boosted expectations for the Fed to act more hawkishly, saying that higher-than-expected June inflation might require policymakers to consider a 100 basis point increase at their meeting later this month. July 14 Thursday 11:08AM New York / 1508 GMT Price Current Net Yield % Change (bps) Three-month bills 2.4225 2.4711 0.095 Six-month bills 2.8875 2.9707 0.026 Two-year note 99-159/256 3.2006 0.057 Three-year note 99-104/256 3.2092 0.069 Five-year note 100-176/256 3.0992 0.080 Seven-year note 101-20/256 3.0766 0.079 10-year note 99-48/256 2.9706 0.065 20-year bond 98-80/256 3.3671 0.026 30-year bond 95-172/256 3.0982 0.030 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 27.50 4.75 spread U.S. 3-year dollar swap 7.00 3.50 spread U.S. 5-year dollar swap 0.00 1.00 spread U.S. 10-year dollar swap 7.75 0.50 spread U.S. 30-year dollar swap -26.00 -1.00 spread (Reporting by Gertrude Chavez-Dreyfuss in New York and Saikat Chatterjee in London; Editing by Simon Cameron-Moore and Richard Chang)

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