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TREASURIES-Yields fall as yield curve control remains in question

Karen Pierog

(Recasts, updates yields, adds Fed funds futures, analyst comment, results of bond auction) By Karen Pierog CHICAGO, June 11 (Reuters) - U.S. Treasury yields continued their downward trajectory on Thursday amid uncertainty over whether the Federal Reserve would turn to yield curve control in the coming months, while the prospect of negative interest rates seeped back into the market. With a nosedive in stocks signaling that investors are growing wary of risk, yields on the long end of the curve fell the most. The benchmark 10-year yield was last down 9 basis points at 0.6576%. Traders resumed betting on the Fed funds rate going below zero, with some futures contracts rising back to 100 or slightly above after retreating from similar levels last week amid market optimism that the economic hit from the coronavirus pandemic would not be as bad as feared. On Wednesday, Fed Chairman Jerome Powell said policymakers had a full discussion about employing yield curve controls, but for now would continue with the Fed's current level of purchases of Treasury bonds and mortgage-backed securities. Tom Simons, money market economist at Jefferies in New York, said of yield curve control that while "we do seem to be heading in that direction, nothing that we got from the Fed yesterday really suggests that it's a particularly near-term prospect." Under yield curve control, the Fed would target a particular yield and buy enough bonds to keep the rate from rising above that target level. The Fed has adopted yield curve caps only once before, to assist the Treasury in financing the cost of World War Two. Michael Kushma, chief investment officer of global fixed income at Morgan Stanley Investment Management in New York, said the move was unlikely unless "the economy fails to respond and Treasury yields end up being higher than desired." "It will probably only be at the shorter end of the yield curve. They'll extend out from the overnight rate, the Fed funds rate out to two years or three years," Kushma added. Expectations that the Fed will cap short-dated Treasury yields had increased demand for trades that benefit from yield curve steepening. Investors are betting that short-term rates will be held down by the Fed's low rate policy, while long-dated debt will be hurt by improving economic expectations and increasing Treasury supply. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, which is viewed as an indicator of economic expectations, was at 47.40 basis points, about 8 basis points lower than at Wednesday's close. It reached 72 basis points on Friday, the steepest since March, after data showed the U.S. economy unexpectedly added jobs in May. Meanwhile, the Treasury sold $19 billion of 30-year bonds at a high yield of 1.45% and with a bid-to-cover ratio of 2.3 times. Kushma said the sale was helped by "a pretty big short base heading into the auction" and the risk-off behavior in stocks. The 30-year yield was last down 11.5 basis points at 1.4046%. June 11 Thursday 2:24PM New York / 1924 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1725 0.1755 0.003 Six-month bills 0.18 0.1827 -0.002 Two-year note 99-226/256 0.1847 0.006 Three-year note 100-24/256 0.2186 0.003 Five-year note 99-180/256 0.3103 -0.027 Seven-year note 99-248/256 0.5046 -0.059 10-year note 99-176/256 0.6576 -0.090 20-year bond 98-240/256 1.185 -0.114 30-year bond 96-60/256 1.4046 -0.115 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 -1.00 spread U.S. 3-year dollar swap 4.75 -1.50 spread U.S. 5-year dollar swap 4.50 -1.25 spread U.S. 10-year dollar swap -1.00 -0.25 spread U.S. 30-year dollar swap -47.75 -1.50 spread (Reporting by Karen Pierog; Editing by Dan Grebler and Will Dunham)