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TREASURIES-Inflation bets send yields up to new milestone

Ross Kerber
·3 min read

(Updates with market activity, mid-curve details) By Ross Kerber Feb 25 (Reuters) - Traders anticipating rising inflation accelerated a bond sell-off and sent U.S. Treasury yields to new milestone highs on Thursday. The 10-year yield was up 7.4 basis points at 1.463% and reached as high as 1.494%, the highest in a year. The trading also pushed up 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. It went as wide as 132 basis points, the most since late 2016, and was last at 131 basis points, 6 more than Wednesday's close. Other parts of the yield curve also widened. Analysts said the trading showed investors positioning for price increases on goods and services internationally, even after top U.S. Federal Reserve and European Central Bank officials tried to talk down rising yields. "It's starting to become a momentum trade and the sell-off is becoming a global phenomenon," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. U.S. weekly jobless claims fell more than expected, further fueling risk-on sentiment. Also rising significantly Thursday were yields in the "belly," or middle of the cover on five-year and seven-year U.S. Treasury notes, with the five-year up 9.2 basis points at 0.7184% in midday trading. Analysts said the moves could reflect holders of mortgage-backed securities selling the bonds as they reduce risks on loans they manage, known as "convexity hedging." Poor results in an auction of five-year notes on Wednesday could also be driving the trading, said Justin Hoogendoorn, head of fixed income strategy at Piper Sandler Cos. Investors will watch to see the results of an auction of $62 billion of seven-year notes, he said, with results due in the early afternoon. "A reasonable seven-year auction should calm the market in the belly of the curve," Hoogendoorn said. The U.S. secured overnight financing Rate (SOFR), which measures the cost of borrowing cash overnight using Treasury securities as collateral, was at 0.02% on Thursday after dropping to 0.01% on Wednesday, the lowest since May 2020. SOFR has replaced the London interbank offered rate (LIBOR) as an interest rate benchmark for banks. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 2.7 basis points at 0.1544%. The yield on 30-year Treasury Inflation Protected Securities was at 0.193% after reaching as high as 0.214%, the highest in a year. The 10-year TIPS yield was at -0.695% and the breakeven inflation rate was at 2.156%. February 25 Thursday 11:45AM New York / 1645 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0425 0.0431 0.010 Six-month bills 0.055 0.0558 0.005 Two-year note 99-241/256 0.1544 0.027 Three-year note 99-126/256 0.2969 0.056 Five-year note 98-238/256 0.7184 0.092 Seven-year note 97-160/256 1.107 0.090 10-year note 96-224/256 1.463 0.074 20-year bond 95-128/256 2.1535 0.080 30-year bond 90-240/256 2.2949 0.053 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.75 -0.25 spread U.S. 3-year dollar swap 9.75 0.00 spread U.S. 5-year dollar swap 9.25 -2.50 spread U.S. 10-year dollar swap 5.50 -0.50 spread U.S. 30-year dollar swap -29.75 -2.00 spread (Reporting by Ross Kerber in Boston; editing by Jonathan Oatis)