(Adds comments from Fed's Barkin, Guggenheim; updates prices) By Karen Brettell NEW YORK, March 22 (Reuters) - Yields dipped on Monday but held near more than one-year highs as investors bet on a faster U.S. economic recovery and higher inflation pressures, and before the Treasury will this week sell $183 billion in short- and intermediate-dated notes. Yields rose after the Fed last Wednesday said that the U.S. economy is heading for its strongest growth in nearly 40 years, and central bank policymakers are pledging to keep their foot on the gas despite an expected surge of inflation. At the same time, Fed officials have refrained from expressing any concern about the recent pickup in yields, saying the move reflects optimism about the economy. “The market is still coming to terms with the fact that this Fed is going to be focused on maximizing employment and is going to let inflation run,” said Patrick Leary, chief market strategist and senior trader at Incapital. Yields are “still overall low enough for the Fed; whether that will change at some point and what those numbers are, we don’t really know,” Leary said. Benchmark 10-year notes fell 5 basis points to 1.684%, after reaching 1.754% on Thursday, the highest since January 2020. The yield curve between two-year and 10-year noteswas 153 basis points, after reaching 160 basis points on Thursday, the steepest since 2015. Ten-year Treasury Inflation Protected-Securities (TIPS) are pricing in annual inflation expectations of 2.33% for the coming decade, after going as high as 2.34% on Thursday, the most since 2014. Guggenheim Investments said in a note on Monday that the selloff may have "largely run its course," noting that the market is now pricing in a neutral rate of 2.35%, which is in line with the Fed's "optimistic" expectations. The neutral rate is the theoretical level at which the fed funds rate is seen as being neither accommodative nor restrictive. Richmond Federal Reserve President Thomas Barkin on Monday said he doesn't believe the U.S. economy is anywhere near the bar the central bank set before it will begin to even consider pulling back on its bond-buying program. Investors will watch demand for auctions of short- and intermediate-dated notes this week, after a seven-year note auction last month saw very weak demand and sparked a dramatic sell-off across the Treasury curve. The Treasury will sell $60 billion in two-year notes on Tuesday, $61 billion in five-year notes on Wednesday and $62 billion in seven-year notes on Thursday. Leary said that five-year notes may be attractive to investors looking for fixed income as they offer a large pickup in yields from two- and three-year notes, which are anchored by the Fed’s zero rate policy. Longer-dated maturities, by contrast, have more risk. “The five-year is where you get some bang for your buck. ... It’s an opportunity to get some risk-adjusted return,” Leary said. Five-year yields were last at 0.858%. That compares to three-year yields at 0.321% and two-year yields at 0.149%. Bank demand for Treasuries will also be under scrutiny for the coming few months after the Fed on Friday declined to extend pandemic-related regulatory relief for big U.S. banks, which means they may need to raise capital against holdings of U.S. Treasuries and central bank deposits. Treasury bill yields bounced on Monday, after trading near zero last Thursday. One-month bill yields were last at 2-1/2 basis points, after falling to only half a basis point on Thursday. The cost of borrowing in the overnight repurchase agreement market also edged higher to 1 basis point, after trading below zero last week. March 22 Monday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 0.01 0.0101 0.000 Six-month bills 0.035 0.0355 0.011 Two-year note 99-244/256 0.1492 -0.002 Three-year note 99-202/256 0.3212 -0.008 Five-year note 98-70/256 0.8579 -0.024 Seven-year note 98-160/256 1.3331 -0.038 10-year note 94-236/256 1.684 -0.048 20-year bond 93-104/256 2.2893 -0.068 30-year bond 89-48/256 2.3826 -0.068 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 11.25 0.50 spread U.S. 3-year dollar swap 12.50 0.50 spread U.S. 5-year dollar swap 9.75 0.25 spread U.S. 10-year dollar swap 1.25 -0.25 spread U.S. 30-year dollar swap -25.75 1.00 spread (Reporting by Karen Brettell; Editing by Jonathan Oatis and Sonya Hepinstall)
Our Standards: The Thomson Reuters Trust Principles.