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TREASURIES-Yield curve flatter on coronavirus, stimulus concerns

Ross Kerber
·3 min read

(Updates with market activity, analyst comment, BlackRock commentary) By Ross Kerber Oct 26 (Reuters) - Longer-term U.S. Treasury yields fell on Monday as investors sold stocks amid a fast-rising case count in the COVID-19 pandemic and as stimulus talks in Washington dragged on. The benchmark 10-year yield was down 4.3 basis points in afternoon trading at 0.7977%, well below its four-month high reached on Friday. New coronavirus infections touched record levels in the United States recently, with El Paso, Texas, asking citizens to stay at home for the next two weeks, while in Europe, Italy and Spain imposed new restrictions. Equity markets fell and the Dow was on track for its worst day in more than seven weeks. Traders worry additional lockdowns will slow economies, a story the U.S. Treasury market seemed to ignore for much of October, said Jim Barnes, director of fixed income for Bryn Mawr Trust. In addition. investors had hoped for a stimulus deal between Republicans and Democrats that would prop up prices, but that seemed little closer as of Monday. "The market has been having a hard time looking beyond the short-term disagreements" in Washington, Barnes said. Jim Vogel, interest rate strategist for FHN Financial, said another factor in Monday's trading was the difficulty of predicting which party will control the U.S. Senate after the Nov. 3 elections. "There's enough uncertainty with regards to how the Senate elections come out, it's easier to wait rather than sell Treasuries on the expectation of a certain outcome," Vogel said. Democratic control, coupled with a predicted win for the party's presidential candidate Joe Biden, is generally expected to send markets higher on the expectation of an end to Washington gridlock, he said. In a research note on Monday analysts for top asset manager BlackRock Inc wrote they had downgraded U.S. Treasuries and upgraded their inflation-linked counterparts ahead of the election, citing a growing likelihood of fiscal expansion that would occur should Democrats win both the White House and the U.S. Senate. "This electoral outcome would bring forward the market pricing of the higher inflation regime that we were already reflecting in our strategic asset views," BlackRock wrote. A closely watched part of the U.S. Treasury yield curve, measuring the gap between yields on two- and 10-year Treasury notes seen as an indicator of economic expectations, was at 65 basis points, about 4 basis points lower than Friday's close. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down less than a basis point at 0.1494% in afternoon trading. October 26 Monday 2:02PM New York / 1802 GMT Price Price Current Net Yield % Change (bps) Three-month bills 0.0925 0.0938 0.000 Six-month bills 0.11 0.1116 -0.002 Two-year note 99-244/256 0.1494 -0.006 Three-year note 99-208/256 0.1884 -0.014 Five-year note 99-136/256 0.346 -0.024 Seven-year note 98-176/256 0.5685 -0.035 10-year note 98-96/256 0.7977 -0.043 20-year bond 96 1.356 -0.053 30-year bond 94-232/256 1.5902 -0.056 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 8.00 0.25 spread U.S. 5-year dollar swap 6.75 0.00 spread U.S. 10-year dollar swap 2.50 0.00 spread U.S. 30-year dollar swap -34.00 0.50 spread (Reporting by Ross Kerber in Boston Editing by Nick Zieminski/Mark Heinrich)