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TREASURIES-Yield curve steepest in three years as market awaits COVID-19 stimulus

Kate Duguid
·2 min read

(New throughout)

By Kate Duguid

NEW YORK, Dec 18 (Reuters) - The Treasury yield curve steepened on Friday to its highest since February 2018 as investors waited to see whether the U.S. Congress would agree on $900 billion in fresh COVID-19 relief by the end of the day.

The spread between the two- and 10-year yields , the most common measure of the yield curve, rose as high as 82.7 basis points on Friday afternoon, its steepest in three years. The spread between the five- and 30-year yields also widened, but only to its highest since Dec. 7.

The yield curve broadly has steepened this week on stimulus and vaccine optimism, as well as the Federal Reserve's decision on Wednesday to maintain its current pace and duration of bond buying, which pushed longer-dated yields higher. A recent move higher in longer-dated yields sparked debate over whether the Fed would alter its Treasury purchases to cap yields.

The 10-year yield was last up 1.3 basis points at 0.943%. The 30-year yield rose 1.8 basis points to 1.693%. The short end of the curve dipped, with the two-year yield last down 0.4 basis point at 0.123%.

Congress looked increasingly unlikely on Friday to meet a deadline to agree on a new coronavirus stimulus bill and instead may pass a third stopgap spending bill to keep the government from shutting down at midnight. But the move steeper in the Treasury market suggested investors still believed a deal would get done.

With Brexit and U.S. fiscal negotiations expected to stumble across the finish line this weekend, and U.S. stock market indexes lower, U.S. Treasuries "showed hardly any sympathy to established correlations," wrote Edward Acton, U.S. rates strategist at Citigroup.

"After a modest flattening rally on the New York open ... the term-structure promptly sold off back to the overnight yield and curve highs and tread water there for the vast majority of the afternoon," said Acton, noting that low trading volume - roughly 60% of the 30-day average - contributed to the lack of movement.

U.S. cities have reimposed shutdowns as coronavirus infections have resurged, leading to a jump in weekly jobless claims to a three-month high reported Thursday. Stimulus hopes, and the rollout this week of a COVID-19 vaccine, have so far allowed the Treasury market to shrug off the bleak labor market data. (Reporting by Kate Duguid; Editing by Richard Chang and Jonathan Oatis)