Yields edge down after Fed's dovish hike

U.S. Treasury yields dipped on Thursday, a day after the Federal Reserve hiked rates by 25 basis points but indicated that it is on the verge of pausing further increases after the recent collapse of two U.S. banks.

Fed Chair Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of Silicon Valley Bank "failed badly," but that the bank's collapse did not indicate wider weakness in the banking system.

Powell also said in a news conference that officials were still intent on fighting inflation while also eying the extent to which recent bank failures had cooled demand and slowed lending.

“They basically tried to thread the needle yesterday between the need to hike rates to bring inflation down and really committing to stabilizing the banking sector,” said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.

Investors expect Fed policy to be largely data dependent, with systemic risks from the banking system now also a factor.

"Effectively the market is saying - as long as the data’s fine we continue to watch the banking headlines, but if the data’s not fine, that obviously means that the Fed can’t keep hiking,” Goldberg said.

Fed funds futures traders are pricing in a roughly equal chance that the Fed will hike rates by an additional 25 basis points in May, or leave the rate unchanged at 4.75% to 5.0%. But they also see the Fed cutting rates to 4.13% by December. (FEDWATCH)

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits edged down last week.

Benchmark 10-year note yields US10Y fell two basis points to 3.477% and two-year yields (US2YT=RR) dropped four basis points to 3.938%.

The inversion in the closely watched yield curve between two-year and 10-year notes (US2US10=TWEB) narrowed to minus 44 basis points.

Treasuries also benefited from some safe haven demand after U.S. Treasury Secretary Janet Yellen told lawmakers on Wednesday that she has not considered or discussed "blanket insurance" for U.S. banking deposits without approval by Congress.

The Treasury Department will sell $15 billion in 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

March 23 Thursday 9:23AM New York / 1323 GMT