Bonds News

REFILE-TREASURIES-Inflation bets, poor auction catapult key yield above 1.5%

 (Refiles to remove extraneous word "send" in headline)
    By Ross Kerber
    Feb 25 (Reuters) - Benchmark U.S. Treasury yields vaulted to
their highest since the pandemic began on Thursday as the week's
sell-off in bonds on rising economic expectations and inflation
concerns continued, accelerated by a disappointing auction of
7-year notes at midday.
    The 10-year yield was up 15.7 basis points at
1.5459%, and touched as high as 1.614%, the highest in a year.
The steepest points sell-off in the safe-haven security since
May roiled the stock market, which broke with the more usual
recent pattern of rising alongside yields as growing optimism
about economic recovery encourages risk-on trading strategies.
    A big move came in the early afternoon when an auction for
$62 billion of 7-year notes by the U.S. Treasury
showed poor demand, with a bid-to-cover ratio of 2.04, the
lowest on record according to a note from DRW Trading market
strategist Lou Brien, who called the result "terrible." 
    The trading also pushed up a closely watched part of the
U.S. Treasury yield curve measuring the gap between yields on
two- and 10-year Treasury notes, seen as an
indicator of economic expectations. It went as wide as 141 basis
points, the most since 2015, and was last at 137 basis points,
13 more than at Wednesday's close. Other parts of the yield
curve also steepened.
    Analysts said the trading showed investors positioning for 
price increases on goods and services internationally, even
after top U.S. Federal Reserve and European Central Bank
officials tried to talk down rising yields.
    "It's starting to become a momentum trade and the sell-off
is becoming a global phenomenon," said Subadra Rajappa, head of
U.S. rates strategy at Societe Generale. 
    Fewer Americans filed new claims for unemployment benefits
last week amid falling COVID-19 infections, Labor Department
figures showed on Thursday, suggesting the labor market was
slowly regaining traction. A surprisingly large 3.4% jump in
orders for large manufactured goods last month also bolstered
the recovery picture. 
    Even so, Wall Street's main indexes dropped on Thursday,
with the Nasdaq on track for its worst day in four months, as
technology-related stocks remained under pressure after the rise
in bond yields.
    Even before Thursday's auction, yields on five-year
 and seven-year notes, the "belly" or middle of the
curve, had risen significantly, following weak demand for a
5-year auction on Wednesday.
    Analysts said the moves could reflect holders of
mortgage-backed securities selling the bonds as they reduce
risks on loans they manage, known as "convexity hedging."

    Eurodollar futures, which track short-term U.S.
interest rate expectations over the next few years, have priced
in a U.S. rate hike by March 2023. This pricing has been pulled
forward from late-2023 in the past few weeks.
    Similarly, Fed funds futures are pricing in a rate
hike in early 2023, now in line with Eurodollar futures.
    The U.S. secured overnight financing rate (SOFR),
 which measures the cost of borrowing cash overnight using
Treasury securities as collateral, was at 0.02% on Thursday
after dropping to 0.01% on Wednesday, the lowest since May 2020.
SOFR has replaced the London interbank offered rate (LIBOR) as
an interest rate benchmark for banks.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was up 4.3 basis
points at 0.1701%.
    The yield on 30-year Treasury Inflation Protected Securities
 was at 0.239% after reaching as high as 0.307%,
the highest in a year. The 10-year TIPS yield was
at -0.6% and the break-even inflation rate was at 2.172%.
    February 25 Thursday 3:32PM New York / 2032 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.0425       0.0431    0.010
 Six-month bills               0.06         0.0609    0.010
 Two-year note                 99-233/256   0.1701    0.043
 Three-year note               99-92/256    0.342     0.101
 Five-year note                98-112/256   0.8198    0.194
 Seven-year note               96-224/256   1.2218    0.205
 10-year note                  96-32/256    1.5459    0.157
 20-year bond                  93-192/256   2.266     0.192
 30-year bond                  90-12/256    2.3388    0.097
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         7.50        -0.50    
 U.S. 3-year dollar swap         9.00        -0.75    
 U.S. 5-year dollar swap         7.00        -4.75    
 U.S. 10-year dollar swap        3.75        -2.25    
 U.S. 30-year dollar swap      -31.25        -3.50    
 spread (Reporting by Ross Kerber in Boston; Editing by Alden Bentley,
Will Dunham, Jonathan Oatis, Andrea Ricci and Sonya Hepinstall)