Bonds News

TREASURIES-Yields retreat, 20-year bond auction struggles

 (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
    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
    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
    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
   February 17 Wednesday 3:31PM New York / 2131 GMT
                               Price        Current   Net
                                            Yield %   Change
 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       
 U.S. 2-year dollar swap         9.00        -0.25    
 U.S. 3-year dollar swap         9.75         0.25    
 U.S. 5-year dollar swap        12.00         0.00    
 U.S. 10-year dollar swap        7.25        -1.50    
 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)