TREASURIES-Yields rise on bank sector optimism

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By Karen Brettell NEW YORK, March 27 (Reuters) - U.S. Treasury yields rose on Monday on greater optimism that stress in the banking sector will be contained and before the Treasury Department will sell short- and intermediate-dated debt. First Citizens BancShares Inc cheered investors when it said on Monday it would acquire the deposits and loans of failed Silicon Valley Bank, closing one chapter in the crisis of confidence that has ripped through global financial markets. Treasuries have been volatile as investors try to gauge the impact bank failures will have on lending and growth and what that will ultimately mean for the path of interest rates. “We’re really flying blind in terms of trying to get a sense of how much more contagion there’s going to be in the banking system, step 1, and then step 2 whether that’s going to have broad economic fallout and step 3 how big is the fallout,” said Thomas Simons, money market economist at Jefferies in New York. “As a consequence, the market trades very skittish and emotionally and a lot of information’s trying to be processed at the same time but it’s been so incomplete that we get starkly different views coming out of the consensus at any given time,” Simons said. Benchmark 10-year yields rose 12 basis points to 3.498% on Monday. They are up from a six-month low of 3.285% reached on Friday, but remain below a 15-year high of 4.338% from Oct. 21. Two-year yields rose 17 basis points to 3.951%, up from a six-month low of 3.555% on Friday but below the almost 16-year high of 5.084% hit on March 8. The closely watched yield curve between two-year and 10-year notes was last at minus 46 basis points. Minneapolis Fed president Neel Kashkari said on Sunday that recent stress in the banking sector and the possibility of a follow-on credit crunch brought the U.S. closer to recession. It comes after St. Louis Fed President James Bullard said on Friday that the U.S. central bank would likely need to raise interest rates higher than expected, while Atlanta Fed President Raphael Bostic said that the Fed's main job was to remain focused on getting inflation lower. Fed funds futures traders are now pricing in a 42% chance of a 25 basis point rate increase in May, and a 58% probability that rates stay unchanged, though they still see the benchmark rate dropping to 4.16% by December, from 4.83% now. Demand for short-and intermediate-dated debt will be tested this week with the Treasury Department due to sell $120 billion in the notes. This will include $42 billion in two-year notes on Monday, $43 billion in five-year notes on Tuesday and $35 billion in seven-year notes on Wednesday. March 27 Monday 9:05AM New York / 1305 GMT Price Current Net Yield % Change (bps) Three-month bills 4.655 4.7727 0.083 Six-month bills 4.68 4.8701 0.116 Two-year note 101-60/256 3.9508 0.174 Three-year note 102-104/256 3.7592 0.173 Five-year note 101-238/256 3.5687 0.161 Seven-year note 102-196/256 3.5457 0.143 10-year note 100-4/256 3.4978 0.120 20-year bond 100-28/256 3.8668 0.092 30-year bond 98-4/256 3.7356 0.092 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 32.00 0.75 spread U.S. 3-year dollar swap 18.25 0.75 spread U.S. 5-year dollar swap 8.75 0.25 spread U.S. 10-year dollar swap 0.50 1.00 spread U.S. 30-year dollar swap -45.75 0.75 spread (Reporting by Karen Brettell; Editing by Alison Williams)