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TREASURIES-Ten-year Treasury yields dip; yield curve steepens

·3 min read

(New throughout, updates prices, yields, market activity and comments, adds auction results) By David Randall NEW YORK, June 22 (Reuters) - Benchmark 10-year Treasuries yields inched lower on Tuesday after briefly popping above 1.5% as rising inflation expectations steepened the yield curve for the first time since June 15. The spread between 5-year and 30-year Treasury yields rose to 124.30 basis points, a day after hitting a low of 107.80, while the spread between 2 and 10-year Treasury yields reached 123.86 basis points a day after touching its lowest levels since February. The yield curve - a measure of future inflation expectations - had been narrowing since mid-May as investors bet the Federal Reserve will act to clamp down on inflation as the global economy rebounds from the coronavirus pandemic. The central bank surprised some market participants with its hawkish turn at its policy meeting last week. Fed Chairman Jerome Powell is due to speak before Congress on Tuesday afternoon, which investors will watching for further clues into when the central bank will begin withdrawing its support of the economy and how persistent it believes inflation will be following the reopening of the economy. Several other key Fed officials will make appearances throughout the week. The 10-year yield eked down to 1.4784% after touching 1.509% earlier in the day. Two-year yields, which are more sensitive to interest rate changes, dropped to 0.2382% while long duration 30-year bond yields edged higher to 2.109%. The Treasury market will likely remain volatile over the summer as investors look ahead toward the Fed's annual symposium at Jackson Hole, Wyoming in late August, analysts said. "There remains a degree of collective disbelief in the outright level of yields despite the Fed’s less dovish pivot and the implication for the forward path of policy rates," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. The Fed last week signaled a potentially tougher stance on inflation and shifted projections for its first two rate hikes into 2023, sparking a selloff in U.S. stocks, boosting the dollar and flattening the Treasury yield curve in its fastest re-shaping since March 2020, according to Citi analysts. The Treasury Department auctioned $60 billion in 2-year notes Tuesday with a yield of 0.249%, a result that was largely in line with Wall Street expectations. The auction results point to continuing demand, which will likely mean that 2-year yields are near the bottom of a new trading range, said Thomas money market economist at Jefferies LLC. "There is still a lot of cash floating around in the front-end of the curve and although we may see 2s back up to the higher end of the range, downside is pretty limited," he noted. Meanwhile, the Federal Reserve's reverse repurchase window on Monday took in a record $$791.6 billion in cash from 74 counterparties, a sign investors see few attractive options available in a low-yield environment. Price Current Net Yield % Change (bps) Three-month bills 0.0425 0.0431 0.000 Six-month bills 0.05 0.0507 -0.005 Two-year note 99-200/256 0.2382 -0.016 Three-year note 99-106/256 0.4483 -0.024 Five-year note 99-112/256 0.8666 -0.019 Seven-year note 100-40/256 1.2264 -0.010 10-year note 101-84/256 1.4801 -0.005 20-year bond 103-120/256 2.037 -0.002 30-year bond 105-224/256 2.109 0.003 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.00 1.00 spread U.S. 3-year dollar swap 8.75 1.25 spread U.S. 5-year dollar swap 6.00 0.75 spread U.S. 10-year dollar swap -3.75 0.50 spread U.S. 30-year dollar swap -33.50 -0.50 spread