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TREASURIES-U.S. yields fall as risk aversion weighs; inflation in focus

·4 min read

* U.S. 2/10 yield curve hits largest inversion since early April * U.S. 3-year auction shows mixed results * U.S. 3-month, 6-month auctions show demand but for higher yields * Focus on upcoming CPI data (Adds new comments, U.S. 3-year auction results, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, July 11 (Reuters) - U.S. Treasury yields dropped on Monday in choppy trading, in line with Europe, drawing safe-haven bids amid a sell-off on Wall Street driven by growth concerns that could hurt earnings. This was the first drop in U.S. benchmark 10-year yields in four sessions. U.S. 10-year yields were last down 11 basis points to 2.99%. "This looks more like a traditional risk-off mode," said Zachary Griffiths, rates strategist at Wells Fargo in Charlotte, North Carolina. "We're having a big sell-off in equities in the U.S., and had big ones in Europe and Asia as well. The rally is interesting given the supply of Treasuries we have over the next couple of days." The three major U.S. stock indexes were down on Monday. Risk-off sentiment, further pressured by Macao's first casino shutdown in over two years to curb the spread of COVID-19, sent the Nasdaq into negative territory, with market leading tech- and tech-adjacent megacap stocks weighing heaviest. Euro zone bond yields were also lower on Monday while long-term inflation expectations dropped below 2% as recession fears deepened after warnings about a possible cut in Russian gas supplies. In afternoon trading, U.S. 30-year bond yields were down 9.2 bps at 3.177%. On the short end of the curve, U.S. two-year yields dropped 5.5 bps to 3.065%. The U.S. 2/10 yield curve remained inverted, with the two-year exceeding that of the 10-year by as much as 8.7 bps , the largest inversion since early April. It has been inverted in the last four sessions. Inversions are considered a harbinger of eventual recession. On Monday, the U.S. Treasury auctioned $43 billion in three-year notes, a billion lower from last month, with mixed results. The high yield of 3.093% came below the expected rate at the bid deadline, suggesting there was appetite for the note even though the safe-haven rally pushed yields lower. There were $104.4 billion in bids for a 2.43 bid-to-cover ratio, a gauge of demand, slightly down from 2.45 last month, even with the $1 bln reduction in size. Post-auction, U.S. three-year yields were down 5.9 bps at 3.099% The Treasury's $93 billion U.S. three-month and six-month auctions went poorly, with the yields for both bills post-auction much higher than the expected rate at the deadline. "The big $6 billion increase in the volume of the three-month hurt the bidding metric," said Kim Rupert, managing director for fixed income at Action Economics in San Francisco. "Uncertainties over the FOMC's (Federal Open Market Committee) path left many sidelined, while there remains strong usage of the Fed's reverse repo facility," she added. On Tuesday, the U.S. Treasury will auction 10-year notes. Investors are also looking ahead to Wednesday's U.S. CPI, which could determine the pace of the Fed's rate hikes. Economists are forecasting that the year-on-year consumer price index will hit a fresh 40-year high of 8.8% in June, according to a Reuters poll. The monthly core index is seen slipping, however, to 5.8% from 6.0% in May. July 11 Monday 3:35PM New York / 1935 GMT Price Current Net Yield % Change (bps) Three-month bills 2.0175 2.0554 0.092 Six-month bills 2.6625 2.7353 0.093 Two-year note 99-221/256 3.0718 -0.049 Three-year note 99-94/256 3.1024 -0.057 Five-year note 100-232/256 3.0518 -0.088 Seven-year note 101-36/256 3.0668 -0.102 10-year note 98-252/256 2.9946 -0.106 20-year bond 97-96/256 3.4333 -0.106 30-year bond 94-44/256 3.1787 -0.090 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 25.25 -2.25 spread U.S. 3-year dollar swap 7.00 -2.25 spread U.S. 5-year dollar swap 1.75 -1.25 spread U.S. 10-year dollar swap 8.00 -0.50 spread U.S. 30-year dollar swap -25.25 0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis)