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TREASURIES-Longer-term yields climb on prospects for more stimulus

Karen Pierog
·4 min read

(Updates yields, adds analyst and Fed officials' comments, 10-year TIP breakeven rate, and upcoming auctions) By Karen Pierog CHICAGO, Jan 7 (Reuters) - U.S. Treasury yields on the longer end of the curve continued their march higher on Thursday as the market factored in a Democrat-controlled U.S. government and the potential for further stimulus spending. The benchmark 10-year yield, which shot over the 1% level on Wednesday for the first time since March, was last up 3.2 basis points at 1.0744%, while the yield curve steepened. A big move higher in yields on Wednesday, sparked by Georgia runoff elections that gave Democrats control of the U.S. Senate, was later tempered when supporters of Republican President Donald Trump stormed the U.S. Capitol. After the building was cleared, lawmakers certified Democrat Joe Biden's presidential victory early on Thursday. The prospect that Democrats will push for significant stimulus to aid the coronavirus-battered economy added fuel to an ongoing "normalization in the rate market to the extent possible given that the front end is anchored by (U.S. Federal Reserve) policy," according to Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis. With Democrats already controlling the U.S. House of Representatives, "the Georgia Senate elections just added a tailwind to existing trends of reflation and upward pressure on Treasury yields," he said. Andrew Brenner, head of international fixed income at NatAlliance, said that instead of raising taxes to fund federal spending for stimulus or infrastructure, the money will initially come from issuing debt as the Fed considers cutting back on its bond purchases. "You're going to see more supply without any additional Fed support. So I tend to think that's going to push rates higher," he said. The latest Fed officials to weigh in on bond purchases included Chicago Federal Reserve President Charles Evans, who said on Thursday that if inflation does not look on track to return to 2% later this year, central bank may need to do more with its asset purchase program to convince markets it is serious. The 10-year Treasury Inflation Protected Securities breakeven inflation rate, which this week topped 2% for the first time since November 2018, hovered around 2.1% on Thursday. Philadelphia Federal Reserve Bank President Patrick Harker earlier on Thursday said the central bank is unlikely to taper them until the end of this year at the earliest. 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. Yields also got a lift after data on Thursday showed U.S. services industry activity accelerated last month with the Institute for Supply Management's non-manufacturing activity index climbing to a 57.2 reading from 55.9 in November. Ahead of Friday's December employment report, the U.S. Labor Department reported first-time claims for jobless benefits unexpectedly dipped to a seasonally adjusted 787,000 for the week ended Jan. 2, from 790,000 in the prior week. According to a Reuters survey of economists, nonfarm payrolls likely increased by 71,000 jobs last month after rising by 245,000 in November, while the unemployment rate was expected to rise to 6.8% from 6.7% in the previous month. Meanwhile, the U.S. Treasury announced auctions next week for a record $58 billion of three-year notes, as well as for $38 billion of 10-year notes, and $24 billion of 30-year bonds. The most closely watched part of the yield curve, which measures the gap between yields on two- and 10-year Treasury notes, remained at its widest level since 2017. It was last up 3.52 basis points at 93.36 basis points. The spread between five-year notes and 30-year bonds, which is currently at levels last seen in 2016, widened to as much as 141.28 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was last down less than a basis point at 0.1408%. January 7 Thursday 3:56PM New York / 2156 GMT Price Current Net Yield % Change (bps) Three-month bills 0.085 0.0862 -0.003 Six-month bills 0.09 0.0913 0.000 Two-year note 99-248/256 0.1408 -0.004 Three-year note 99-190/256 0.2132 0.005 Five-year note 99-152/256 0.4576 0.026 Seven-year note 99 0.7725 0.032 10-year note 98-36/256 1.0744 0.032 20-year bond 95-140/256 1.6387 0.032 30-year bond 94-224/256 1.8491 0.028 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.00 0.50 spread U.S. 3-year dollar swap 6.50 0.50 spread U.S. 5-year dollar swap 6.50 1.00 spread U.S. 10-year dollar swap -0.75 1.00 spread U.S. 30-year dollar swap -28.00 0.50 spread (Reporting by Karen Pierog; Editing by Dan Grebler and Marguerita Choy)