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TREASURIES-Yields tumble ahead of Federal Reserve policy meeting

Karen Pierog

(Recasts, updates yields, adds risk-off sentiment with stocks) By Karen Pierog CHICAGO, June 9 (Reuters) - U.S. Treasury yields fell on Tuesday as investors defensively bought government debt and awaited word from the Federal Reserve about yield curve control and negative interest rates, subjects of broad speculation, after its policy meeting ends on Wednesday. The risk-off sentiment, which sent some stocks lower, helped push yields down the most on the long end of the yield curve. The benchmark 10-year yield was last down 6.2 basis points at 0.822%, building on Monday's retreat. Yields spiked on Friday in the wake of a better-than-expected May unemployment report, with the 10-year note yield rising above 0.9% for the first time since March 20. Tony Rodriguez, head of fixed income strategy at Nuveen, said the jobs report in particular will give the Fed, which began its two-day meeting on Tuesday, "quite a bit of air cover" to argue against negative interest rates. As for implementing yield curve control in a bid to keep rates near zero, the Fed may indicate only that its evaluation is ongoing, Rodriguez said. "They just have a 'luxury' of being able to continue to have it as a potential tool in their tool kit," he said, adding that it should remain theoretical and part of the Fed's forward guidance given that "yields are low enough." Under yield curve control, the Fed can limit yield increases by buying as many bonds as necessary to keep yields from rising over a certain target. The Treasury, which is financing massive spending to combat the economic fallout from the coronavirus outbreak, sold $29 billion of 10-year notes into soft demand. The bid to cover ratio of 2.26 times was lower than the average of 2.43 times and the high yield of 0.832% was more than a basis point higher than where the market yield was at the bidding deadline, according to post-auction commentary from analysts. The 30-year Treasury yield was last down 8.1 basis points at 1.576%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes that is seen as an indicator of economic expectations was at 61.60 basis points, about 3 basis points lower than at Monday's close. The yield curve spread on Friday hit its widest since late March at more than 72 basis points when the stock market was bottoming. June 9 Tuesday 3:28PM New York / 2028 GMT Price Current Net Yield % Change (bps) Three-month bills 0.17 0.1729 -0.002 Six-month bills 0.185 0.1877 -0.005 Two-year note 99-216/256 0.2044 -0.026 Three-year note 99-250/256 0.2578 -0.037 Five-year note 99-72/256 0.3961 -0.057 Seven-year note 99-16/256 0.6377 -0.056 10-year note 98-32/256 0.822 -0.062 20-year bond 95-240/256 1.3584 -0.073 30-year bond 92-60/256 1.5765 -0.081 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.50 1.50 spread U.S. 3-year dollar swap 5.50 0.50 spread U.S. 5-year dollar swap 4.75 0.75 spread U.S. 10-year dollar swap -1.50 0.50 spread U.S. 30-year dollar swap -47.00 1.25 spread (By Karen Pierog Editing by Marguerita Choy, Nick Zieminski and Jonathan Oatis)