TREASURIES-Yields fall, but come off lows as banks in focus

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(Adds comments from Fed officials, details, updates prices) By Karen Brettell NEW YORK, March 24 (Reuters) - U.S. Treasury yields came off six-month lows reached earlier on Friday but remained lower on the day as concerns about further stress in the banking sector led investors to seek out the safe haven debt. Bank concerns turned to European giants Deutsche Bank and UBS on Friday as investors worried that regulators and central banks have not yet contained the worst shock to the sector since the 2008 global financial crisis. Unease over the impact of higher rates on the beleaguered banking sector is leading investors to expect more dovish monetary policy going forward, and pulling yields lower. “The fact that the Fed was so dovish on Wednesday, which was a result of the volatility we’ve seen in the financial sector ... has definitely been the big reason why we’ve seen this big bull steepening of the curve as the impact of monetary policy tightening starts to show up in the banking sector,” said Ben Jeffery, an interest rate strategist at BMO Capital Markets in New York. The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs after the recent collapse of two U.S. banks. Benchmark 10-year note yields fell as low as 3.285%, the lowest since Sept. 12, before rising back to 3.378% Two-year yields reached 3.555%, the lowest since Sept. 13, and were last 3.777%. The inversion in the closely watched yield curve between two-year and 10-year notes narrowed to minus 27 basis points, before widening back to minus 40 basis points. Fed funds futures traders are now pricing in only an 24% chance that the Fed will hike rates by an additional 25 basis points in May, and an 76% probability it will leave the rate unchanged at 4.75% to 5.0% They also see the Fed cutting rates to 3.94% by December. Fed officials on Friday said there was no indication financial stress was worsening as they gathered at a policy meeting this week, a fact that allowed them to stay focused on lowering inflation with another interest rate increase. St. Louis Fed President James Bullard also said that the U.S. central bank will likely need to raise interest rates higher than expected, and Atlanta Fed President Raphael Bostic said that the Fed's main job must remain focused on getting inflation lower. Still, analysts expect bank concerns to be the main driver of market moves in the near-term. “All we are doing right now, almost literally, is trading bank stocks via Treasuries,” said Jim Vogel, an interest rate strategist at FHN Financial in Memphis. “If you turn your computer off and turn it back on, it reboots in five minutes. If you unplug the valuation system for an entire sector of the stock market, you don’t plug it back in, it has to reboot over a long period of time, and unfortunately banks have to report their earnings and so everyone is going to hold their breath and buy more Treasuries until we start to see actual results from banks,” Vogel said. Investors have been on edge since the collapse of U.S. lenders Silicon Valley Bank and Signature Bank in mid-March, which was followed by the emergency UBS purchase of its ailing rival Credit Suisse on Sunday. U.S. Treasury Secretary Janet Yellen on Thursday sought to reassure jittery investors that American bank deposits were safe and promised policymakers had more firepower to battle any crisis even as bank stocks resumed their slide. Data on Friday showed that new orders for key U.S.-manufactured capital goods unexpectedly rose in February, but data for the prior month was revised sharply down, suggesting that business spending on equipment could be struggling to rebound in the first quarter. March 24 Friday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 4.565 4.68 0.009 Six-month bills 4.5725 4.7562 -0.015 Two-year note 101-143/256 3.7772 -0.029 Three-year note 102-228/256 3.5889 -0.014 Five-year note 102-170/256 3.4075 -0.010 Seven-year note 103-168/256 3.4027 -0.020 10-year note 101-4/256 3.378 -0.026 20-year bond 101-100/256 3.7747 -0.039 30-year bond 99-160/256 3.6455 -0.036 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 31.00 0.75 spread U.S. 3-year dollar swap 17.25 -0.75 spread U.S. 5-year dollar swap 8.50 -1.00 spread U.S. 10-year dollar swap -0.50 -1.00 spread U.S. 30-year dollar swap -46.50 -1.00 spread (Reporting by Karen Brettell; Additional reporting by Harry Robertson and Dhara Ranasinghe in London; Editing by Jonathan Oatis and Nick Zieminski)