(Recasts, updates yields, adds bond auction results) By Karen Pierog Feb 17 (Reuters) - Longer-dated U.S. Treasury yields backed off one-year highs on Wednesday as selling pressure abated despite a weak 20-year bond auction and data pointing to a strengthening economy. The benchmark 10-year yield, which touched 1.333%, its highest level since Feb. 27, 2020, was last down less than a basis point at 1.2922%. The 30-year U.S. yield also fell after reaching a one-year high of 2.112%. It was last down 2.9 basis points at 2.0608%. Stronger-than-expected data showed January retail sales surged by a seasonally adjusted 5.3%, while output at U.S. factories increased 1.0% last month after gaining 0.9% in December. Ben Jeffery, a strategist at BMO Capital Markets in New York, said investors may be swooping in to buy on the dip or cover tactical shorts placed last week. "With the stronger data across the board this morning one would expect higher yields but that is not playing out," he said. "Given the size of the move we saw on Friday, carrying into yesterday, there is probably a little reluctance to continue selling much beyond that 1.30% level that we saw in 10-year yields." Demand was weak for the U.S. Treasury's auction of $27 billion of 20-year bonds that resulted in a high yield of 1.920%, according to analysts. They pointed out the 2.15 times bid-to-cover ratio was the lowest since the maturity was relaunched in May. The 20-year yield, which hit a session high of 1.956% shortly after the auction, was last down 1.1 basis points at 1.9081%. "The 20-year point is really struggling without the support of the (Federal Reserve's) purchases compared with the 10- and 30-year sectors," Tom Simons, money market economist at Jefferies wrote in a report. As for the rise in yields, Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis, said interest rate markets are normalizing with stronger economic data and progress in COVID-19 vaccinations and cases. "The bond market has been sending pretty consistent signals around rising inflation expectations driving longer-term yields higher and that's been a very consistent trend that hasn't really changed meaningfully and now the economic data is just starting to reflect some of the fundamentals behind that market move," he said. Inflation expectations have been climbing with the 10-year Treasury Inflation-Protected Securities' breakeven rate reaching 2.246% on Tuesday, the highest since 2014. It was last at 2.226%. Yields were largely unmoved by the release of minutes from the U.S. Federal Reserve's January meeting, which touched on the public's perception of higher inflation and keeping the central bank's easy monetary policy on track. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 1.4 basis points to 0.1089%, nearing an all-time low of 0.105% reached last week. A closely watched part of the yield curve, which measures the gap between yields on two- and 10-year Treasury notes , steepened to as much as 121 basis points, its widest level since 2017. It was last down less than a basis point at 118.16 basis points. The spread between five-year notes and 30-year bonds , which is at its the widest level since 2015, was last about 1.5 basis points flatter at 149.97 basis points. Spreads on 10-year U.S. interest rate swaps over Treasuries touched 9.5 basis points on Wednesday, the same level as on Tuesday, which was the widest since April 2020. The widening was due to mortgage investors buying interest rate swaps to exchange a fixed coupon with another investor for a floating rate one to hedge mortgage risk because yields are climbing. February 17 Wednesday 3:31PM New York / 2131 GMT Price Current Net Yield % Change (bps) Three-month bills 0.04 0.0406 -0.005 Six-month bills 0.055 0.0558 -0.005 Two-year note 100-8/256 0.1089 -0.014 Three-year note 99-192/256 0.2089 -0.018 Five-year note 99-24/256 0.5609 0.000 Seven-year note 98-192/256 0.9362 0.005 10-year note 98-112/256 1.2922 -0.007 20-year bond 91-68/256 1.9081 -0.011 30-year bond 95-220/256 2.0608 -0.029 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 9.00 -0.25 spread U.S. 3-year dollar swap 9.75 0.25 spread U.S. 5-year dollar swap 12.00 0.00 spread U.S. 10-year dollar swap 7.25 -1.50 spread U.S. 30-year dollar swap -20.75 -1.50 spread (Reporting by Karen Pierog; Additional reporting by Gertrude Chavez-Dreyfuss and Andrea Ricci; Editing by Richard Chang)
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