TREASURIES-Yields tumble as recession fears mount

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(Adds quotes, data, updates prices) By Karen Brettell NEW YORK, July 5 (Reuters) - Benchmark U.S. Treasury yields tumbled to one-month lows on Tuesday and a key part of the yield curve inverted for the first time in three weeks as economic worries dented risk appetite and increased demand for safe-haven U.S. debt. Yields have dropped from the highest levels in more than 10 years as investors worry the Federal Reserve's aggressive rate hikes to fight soaring inflation will send the U.S. economy into a recession. Investors have also pared back expectations on how high the U.S. central bank will raise its benchmark rate as concerns about an economic downturn increase. "It seems like the recession warning bells continue to ring a little bit louder each day," said Thomas Simons, a money market economist at Jefferies in New York. Still, "I think that the yield curve can remain inverted for some time before the Fed actually does change course on policy." The two-year, 10-year part of the Treasury yield curve reinverted, which investors view as a reliable indicator a recession will follow in one-to-two years. The two-year, five-year part of the curve also inverted for the first time since Feb. 2020, another indicator an economic downturn is likely. Benchmark 10-year yields fell as low as 2.780%, the lowest since May 27. They have fallen from 3.498% on June 14, the highest since April 2011. Two-year Treasury yields were at 2.816%, after hitting 2.729% on Friday, the lowest since June 7. They have fallen from 3.456% on June 14, which was the highest since November 2007. Fed funds futures traders are now pricing for the Fed's benchmark rate to peak at 3.29% in February, down from expectations before the Fed's June 14-15 meeting that it would increase to around 4% by May. It is currently 1.58%. The Fed will release minutes from its June meeting on Wednesday. Investors will hunt for new clues on how large rate hikes are likely to be over coming months. The Fed is widely expected to hike rates by 75 basis points for the second meeting in a row when it meets on July 26-27. The minutes also may show more detail on the shift in Fed policy toward a larger June rate increase, said Lou Brien, a market strategist at DRW Trading in Chicago, noting Fed Chairman Jerome Powell had played down the likelihood of such a move before the meeting. Markets scrambled to prepare for a 75 basis points hike after data during the Fed's blackout period showed inflation rising faster than expected. A Wall Street Journal article said the move was possible, which was considered an informal Fed communication. Kansas City Fed President Esther George was the only policymaker to dissent on the decision, preferring a half-percentage-point rate hike. George later said she "viewed that move as adding to policy uncertainty." The next major U.S. economic release will be Friday’s jobs report for June. Economists polled by Reuters expect employers to have added 268,000 jobs during the month. Data on Tuesday showed that new orders for U.S.-manufactured goods increased more than expected in May, bucking a slew of recent data showing a softening in the economy. July 5 Tuesday 3:02PM New York / 1902 GMT Price Current Net Yield % Change (bps) Three-month bills 1.7 1.7306 0.021 Six-month bills 2.4725 2.5375 0.028 Two-year note 100-90/256 2.8163 -0.029 Three-year note 100-40/256 2.8189 -0.056 Five-year note 102-2/256 2.8153 -0.083 Seven-year note 102-120/256 2.8575 -0.083 10-year note 100-140/256 2.8109 -0.093 20-year bond 99-76/256 3.2984 -0.082 30-year bond 96-232/256 3.0331 -0.097 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 27.00 -3.25 spread U.S. 3-year dollar swap 10.25 -1.25 spread U.S. 5-year dollar swap 3.00 -0.25 spread U.S. 10-year dollar swap 7.50 0.00 spread U.S. 30-year dollar swap -24.50 -0.50 spread (Additional reporting by Saikat Chatterjee in London, Editing by Alexandra Hudson and David Gregorio)

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