TREASURIES-Yields rise as investors watch banks, wait on Fed

(Adds data, auction results, comments from Fed's Barr, updates prices) By Karen Brettell NEW YORK, March 29 (Reuters) - Most U.S. Treasury yields were higher on Wednesday as investors continued to evaluate whether recent banking stresses will be contained and what tighter lending standards emanating from recent bank failures will mean for Federal Reserve policy. Yields have risen from six-month lows reached on Friday as stress in the banking sector appeared to subside, following the collapse of Silicon Valley Bank and Signature Bank earlier this month. Greater confidence in the banking system has also increased the likelihood that the Fed will in turn be able to implement another interest rate increase as it focuses on bringing down inflation, but a lot can happen before the U.S. central bank’s May 2-3 meeting. “We have entered an extended period of uncertainty for the economic and policy outlook. The reality is that there’s still a great deal of unknowns linked to the regional and global banking sector,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. “For the time being we appear to be in a moment of calm. Risk assets seem to be performing reasonably well. But I think they’re responding more to the potential for the contagion to be ultimately limited and contained, whereas monetary policy makers are appropriately cautious given what could or could not transpire over the next several weeks,” Lyngen said. Personal Consumption Expenditures (PCE) data on Friday is the next major U.S. economic focus while investors will also be watching for any headlines relating to stress in the banking sector. Data on Wednesday showed that contracts to buy U.S. previously owned homes increased for a third straight month in February, raising cautious optimism that the housing market slump could be bottoming out. Fed funds futures traders are now pricing in a 47% chance of a 25 basis points increase in May, after seeing it as a long shot late last week. The Fed will make its interest rate decisions from here on a meeting-to-meeting basis and will take financial conditions into account in that judgment alongside other factors, Fed Vice Chair for Supervision Michael Barr said on Wednesday. Benchmark 10-year yields were little changed on the day at 3.570%. They are up from a six-month low of 3.285% reached on Friday, but remain below a 15-year high of 4.338% on Oct. 21. Two-year yields rose 3 basis points to 4.089%, 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 52 basis points. The Treasury Department saw soft demand for a $35 billion auction of seven-year notes on Wednesday, the final sale of $120 billion in short- and intermediate-dated debt supply this week. The notes sold at a high yield of 3.626%, around a basis point above where they had traded before the sale. The bid-to-cover ratio was 2.39 times, the lowest since November. The Treasury saw solid demand for a $43 billion sale of five-year notes on Tuesday, but weak interest in a $42 billion auction of two-year notes on Monday. March 29 Wednesday 3:02PM New York / 1902 GMT Price Current Net Yield % Change (bps) Three-month bills 4.64 4.7603 -0.011 Six-month bills 4.7 4.8946 0.046 Two-year note 99-152/256 4.0886 0.027 Three-year note 102-8/256 3.891 0.022 Five-year note 99-192/256 3.6802 0.026 Seven-year note 102-40/256 3.6442 0.020 10-year note 99-108/256 3.5696 0.002 20-year bond 99-96/256 3.9203 0.004 30-year bond 97-64/256 3.7792 -0.006 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 32.25 0.25 spread U.S. 3-year dollar swap 17.25 1.25 spread U.S. 5-year dollar swap 6.00 0.25 spread U.S. 10-year dollar swap -1.00 0.25 spread U.S. 30-year dollar swap -46.75 1.25 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)