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TREASURIES-Prices fall, yield curve steepens on hopes of smaller relief package

Gertrude Chavez-Dreyfuss
·4 mins read

* Trump urges bailout for airlines, small businesses * U.S. yield curve steepens again * U.S. 10-year note auction shows solid numbers * Fed minutes show split on "forward guidance" (Adds new comment, Fed minutes, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Oct 7 (Reuters) - U.S. Treasury prices fell on Wednesday, amid hope there could be a relief package for airlines, small businesses, and individuals, after President Donald Trump scuppered talks for a comprehensive coronavirus-related stimulus the previous session. Bond prices also weakened after a decent outcome for the $35 billion U.S. 10-year note auction on Wednesday, and investors looked to the $23 billion U.S. 30-year bond sale on Thursday. The bid-to-cover for the 10-year note sale, a gauge of demand, was at 2.47, higher than both the 2.30 for the September auction and the 2.41 for the larger new issue in August. U.S. yields recovered following a brief fall late Tuesday after Trump said he would suspend stimulus talks until after the election. The yield curve on Wednesday also resumed its steepening trend on Wednesday after flattening the previous session. Trump said late Tuesday Congress should quickly extend $25 billion in new payroll assistance to struggling U.S. passenger airlines, which laid off thousands of workers as air travel remains down sharply. In a tweet, Trump also urged Congress to approve the $135 billion payroll protection program for small businesses and the stimulus checks of $1,200 for individuals. House Speaker Nancy Pelosi criticized Trump for backing away from talks on a comprehensive deal, but asked Treasury Secretary Steven Mnuchin on Wednesday to review a standalone bill for $25 billion in aid to airlines, her spokesman wrote on Twitter. "There's still some potential for relief," said Justin Lederer, Treasury trader at Cantor Fitzgerald in New York. "In a larger picture, yes, the stimulus could be delayed but overall it would be ultimately passed. We don't know what it would look like and it would depend on who wins the election," he added. In afternoon trading, U.S. 10-year yields rose to 0.786%, from 0.74% late on Tuesday. Ten-year yields rose to their highest level since June earlier on Tuesday. Yields on U.S. 30-year bonds were at 1.593%, up from 1.537% the previous session. Earlier on Tuesday 30-year yields climbed to a four-month peak. The yield curve steepened on Wednesday as well, with the spread between the 10-year and two-year widening to 63 basis points. A steeper curve suggests expectations of higher growth and inflation, as the market continued to price in a victory for Democratic challenger Joe Biden in next month's presidential election. Biden's widening lead in the polls over Trump less than a month before the election and the possibility of a Democratic sweep in Congress have helped the steepening narrative, analysts said. A victory for Biden and a Democratic sweep in Congress would mean higher fiscal spending and more Treasury supply. Tom di Galoma, managing director at Seaport Global Holdings in New York said a substantial steepening of the yield curve typically follows an economic recession. "If the yield curve gets steeper than it is today, I think the Federal Reserve will probably decide to do yield curve control and start buying long-term bonds," he added. Also on Wednesday, the Federal Reserve's minutes to the September policy meeting showed policymakers were divided over how to apply their new approach to monetary policy. Treasuries showed little reaction to the Fed minutes. October 7 Wednesday 2:33PM New York / 1833 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0975 0.0989 0.000 Six-month bills 0.11 0.1116 -0.002 Two-year note 99-240/256 0.1567 0.010 Three-year note 99-196/256 0.2034 0.014 Five-year note 99-136/256 0.345 0.030 Seven-year note 98-192/256 0.5579 0.037 10-year note 98-124/256 0.7851 0.045 20-year bond 96-16/256 1.3518 0.046 30-year bond 94-252/256 1.5866 0.050 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.50 0.25 spread U.S. 3-year dollar swap 7.25 -0.50 spread U.S. 5-year dollar swap 7.00 0.25 spread U.S. 10-year dollar swap 2.25 0.25 spread U.S. 30-year dollar swap -36.50 0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Chang and Chizu Nomiyama)