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TREASURIES-Longer-term yields climb, curve steepens

Karen Pierog
·3 min read

(Recasts, updates yields, adds comments from analyst and Fed officials) By Karen Pierog CHICAGO, Jan 5 (Reuters) - Longer-term U.S. Treasury yields shot higher and the yield curve steepened on Tuesday as the market awaited the outcome of Georgia elections that will determine which party controls the U.S. Senate. The benchmark 10-year yield was last up 3.1 basis points at 0.9482%. The spread between five-year notes and 30-year bonds hit its widest level since November 2016 at 134.73 basis points. It was last at 132.38 basis points. Yields got a lift earlier in the session on stronger-than-expected data that showed U.S. manufacturing activity rose in December to its highest level since August 2018. The Institute for Supply Management said its index of national factory activity rebounded to a reading of 60.7 last month, up from 57.5 in November. Inflation expectations creeping higher and the potential tapering off of assets purchases by the U.S. Federal Reserve were additional catalysts for the jump in yields, according to Stan Shipley, fixed income strategist at Evercore ISI in New York. Atlanta Fed President Raphael Bostic said on Monday that the Fed could begin to trim its monthly asset purchases this year if distribution of coronavirus vaccines boosts the economy. Cleveland Fed President Loretta Mester said on Tuesday that a reduction in purchases could be possible next year, depending on the state of the economy. On Monday, the 10-year Treasury Inflation Protected Securities (TIPS) yield touched a record low of -1.113% reached in September, while the 10-year TIPS breakeven inflation rate topped 2% for the first time since November 2018. "The drop in real yields and the increase in breakevens has been a sign of a little bit of optimism that we will start to see inflation begin to pick up," said Ben Jeffery, a strategist at BMO Capital Markets in New York. Mester also said the Fed also needs to remain accommodative to boost inflation, which is unlikely to move quickly past the central bank's 2% average target. Meanwhile, Georgia residents were casting their votes in runoff elections for two Senate seats. Continued split control of Congress, with a Republican majority in the Senate and Democratic control of the House of Representatives, would hinder substantial fiscal measures, which would help keep Treasury yields in check, according to analysts. Democratic victories in Georgia could push longer-term yields higher if supply increases to fund more stimulus. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was last up less than a basis point at 0.123%. The most closely watched part of the yield curve, the gap between yields on two- and 10-year Treasury notes, was last 2.41 basis points higher at 82.35 basis points. January 5 Tuesday 3:26PM New York / 2126 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0825 0.0837 -0.007 Six-month bills 0.085 0.0862 -0.008 Two-year note 100-1/256 0.123 0.008 Three-year note 99-222/256 0.1703 0.008 Five-year note 100-2/256 0.3734 0.019 Seven-year note 99-190/256 0.6628 0.025 10-year note 99-80/256 0.9482 0.031 20-year bond 98-8/256 1.4899 0.043 30-year bond 98-72/256 1.6986 0.043 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.75 -0.50 spread U.S. 3-year dollar swap 6.75 -0.25 spread U.S. 5-year dollar swap 6.25 -0.25 spread U.S. 10-year dollar swap -0.75 -0.75 spread U.S. 30-year dollar swap -26.50 -1.00 spread (Reporting by Karen Pierog; editing by Jonathan Oatis)