Bonds News

TREASURIES-Inflation bets, poor auction send yields up to new milestones

 (Updates with trading activity, auction result aftermath)
    By Ross Kerber
    Feb 25 (Reuters) - U.S. Treasury yields rose to new
milestone highs on Thursday as the week's sell-off in bonds on
rising inflation fears continued, accelerated by a disappointing
auction of 7-year notes at midday.
    The 10-year yield was up 11.9 basis points at
1.5078%, and touched as high as 1.614%, the highest in a year.
    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 134 basis points,
nine 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. 
    Even before the 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
    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."

    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 3.9 basis
points at 0.1661%.
    The yield on 30-year Treasury Inflation Protected Securities
 was at 0.221% after reaching as high as 0.307%,
the highest in a year. The 10-year TIPS yield was
at -0.630% and the breakeven inflation rate was at 2.141%.
      February 25 Thursday 1:26PM New York / 1826 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.0475       0.0482    0.015
 Six-month bills               0.0625       0.0634    0.012
 Two-year note                 99-235/256   0.1661    0.039
 Three-year note               99-90/256    0.3447    0.104
 Five-year note                98-142/256   0.7956    0.170
 Seven-year note               97-40/256    1.1786    0.162
 10-year note                  96-120/256   1.5078    0.119
 20-year bond                  95-8/256     2.1834    0.109
 30-year bond                  90-144/256   2.3133    0.071
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         6.25        -1.75    
 U.S. 3-year dollar swap         7.25        -2.50    
 U.S. 5-year dollar swap         6.25        -5.50    
 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 Jonathan Oatis
and Andrea Ricci)