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TREASURIES-Ten-year yield hits 1.3%, curve steepens

Karen Pierog
·4 min read

(Recasts, updates yields, adds comments from analyst and Fedofficial) By Karen Pierog Feb 16 (Reuters) - The 10-year U.S. Treasury yield roseabove 1.3% for the first time in nearly a year on Tuesday andthe yield curve steepened as expectations of extended fiscal andmonetary stimulus alongside hopes of an economic upswing addedmomentum to the reflation trade. The benchmark yield, which reached 1.309%, itshighest level since Feb. 27, 2020, when the Coronavirus pandemicwas beginning to affect markets, was last up 9.9 basis points at1.2989%. The 30-year U.S. yield also rose, touching aone-year high of 2.095%. It was last 8.1 basis points higher at2.0853%. "The market is simply looking at the pace of recovery, thepace of the vaccine rollout, and the size of the stimuluspackage, along with an easy (U.S. Federal Reserve) and saying,'Well, the Fed can sit on the short end, but the long end isgoing to really reflect the expectation for stronger growth,higher inflation down the road,'" said Kathy Jones, chief fixedincome strategist at the Schwab Center for Financial Research inNew York. Back from Monday's Presidents Day holiday, Treasuries werecatching up with a global bond sell-off, with German 10-yearyields hitting an eight-month high on Tuesday. U.S. President Joe Biden has been drumming up support for a$1.9 trillion coronavirus relief package. Meanwhile, optimismabout vaccine rollouts has lifted stocks and commodity pricesglobally at the expense of safe-haven assets like Treasuries. Guy LeBas, chief fixed income strategist at Janney CapitalManagement in Philadelphia, said a temporary absence of Asianinvestors was also a negative factor for Treasuries. "What we've seen over the last several months has beenbuying out of Asia and, much of Asia markets are quiet right nowfor the (Lunar New Year) holiday," LeBas said. Another likely factor in the Treasuries sell-off wasconvexity hedging by mortgage-backed securities investorsseeking to reduce risk on loans to counter the negative effectsof slower loan payments when interest rates climb. "I've got to say there must be some of that going on rightnow," Jones said. While long-dated Treasury yields have soared, the two-yearyield has been anchored by expectations the Fed willkeep policy rates near zero for years to come. A closely watched part of the yield curve, which measuresthe gap between yields on two- and 10-year Treasury notes, steepened to as much as 118.43 basis points, itswidest level since 2017. It was last up 8.54 basis points at118.26 basis points. The spread between five-year notes and 30-year bonds grew to as much as 155.35 basis points - the widestsince 2015. It was last at 152.43 basis points. The view that the Fed may let the economy run hot has pushed10-year inflation expectations to their highest since 2014, withthe Treasury Inflation-Protected Securities (TIPS)breakeven inflation rate last at 2.245%. Official talks about tapering Fed bond buying, which couldbegin in the second half of 2021, pose a potential downside riskto breakeven rates, analysts at Cornerstone Macro said in aresearch report on Tuesday. "That could signal to investors, first that a large buyer inthe market is about to become smaller and eventually disappear,and second that the Fed’s resolve to overshoot on inflation maynot be very strong, depending on what the outlook for inflationwill be at that time," the report said. Federal Reserve Bank of Kansas City President Esther Georgesaid on Tuesday the central bank's debate over bond purchaseswill commence when it is clear the Fed is on track to meet itsinflation and employment goals. Ahead of the U.S. Treasury's $27 billion, 20-year bondauction on Wednesday, the 20-year yield was last up9.1 basis points at 1.9141%. February 16 Tuesday 3:41PM New York / 2141 GMT Price Current Net Yield % Change (bps) Three-month bills 0.04 0.0406 0.000 Six-month bills 0.055 0.0558 0.000 Two-year note 100-2/256 0.121 0.010 Three-year note 99-178/256 0.2272 0.034 Five-year note 99-22/256 0.5624 0.077 Seven-year note 98-196/256 0.9338 0.094 10-year note 98-96/256 1.2989 0.099 20-year bond 91-44/256 1.9141 0.091 30-year bond 95-84/256 2.0853 0.081 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 9.25 0.00 spread U.S. 3-year dollar swap 9.50 -0.50 spread U.S. 5-year dollar swap 12.25 0.00 spread U.S. 10-year dollar swap 8.75 1.50 spread U.S. 30-year dollar swap -19.25 1.25 spread (Reporting by Karen Pierog in Chicago, additional reporting bySujata Rao and Abhinav Ramnarayan in London and Kevin Bucklandin Tokyo; Editing by Chizu Nomiyama, Nick Zieminski and JonathanOatis)