March 8, 2018 / 3:57 PM / 5 months ago

TREASURIES-Spread shrinks between U.S., German yields as ECB drops easing bias

    By Kate Duguid
    NEW YORK, March 8 (Reuters) - The yield on the U.S.
benchmark government bond rose on Thursday, tracking its German
counterpart as the European Central Bank dropped its easing
bias, but its move was more muted, compressing the spread
between the two.  
    Germany’s 10-year bond yield rose following
President Mario Draghi's announcement the central bank would
drop a long-standing pledge to increase bond buying if needed. 
    The possibility of increased supply hit U.S. bond prices,
driving the yield on the 10-year Treasury up 1.5
basis points to a session high of 2.892 percent. 
    "It does hammer home the theme that liquidity withdrawal is
something that central banks are participating in globally, not
just the Fed," said Gene Tannuzzo, senior portfolio manager at
Columbia Threadneedle Investments in Minneapolis. 
    Keeping its broader policy unchanged, the ECB said it could
still extend its 2.55 trillion euro ($3.16 trillion) bond
purchase scheme beyond September if needed. But it omitted a
reference to bigger purchases, a signal that it remains on track
to end a three-year-old stimulus scheme before the end of 2018.

    But the U.S. yield move was muted in comparison to the
German one, as traders hesitated ahead of Friday's payrolls data
release. The jump in Bund yields compared with the Treasuries'
move helped shrink the spread between the two.     
    "If we see the ECB stepping back, we see the German curve
start to come up, and we should continue to see that compression
between U.S. yields and lower-yielding European yields. That’s
playing out today and I think will continue over the course of
the year," said Tannuzzo. 
    The spread between German and U.S. benchmark bond yields hit
a session high of -218.60 above yesterday's close at -221.0.
That could continue to rise if European bond yields are driven
up by the ECB tightening monetary policy.
    Yields on both benchmark bonds retraced some of their early
gains during the subsequent news conference with Draghi, during
which he noted that euro zone inflation remained stubbornly low,
and said "Our mandate is in terms of price stability. Victory
cannot be declared yet."
    The 10-year yield was last at 2.854 percent, above
yesterday's close at 2.883 percent. The two-year yield
 was last at 2.246 percent below its last close at
2.254 percent. The 30-year yield was last at 3.117
percent, 3.4 basis points below Wednesday's close. 
    
    March 8 Thursday 10:29AM New York / 1529 GMT
                               Price                  
 US T BONDS JUN8               143-30/32    0-27/32   
 10YR TNotes JUN8              120-64/256   0-56/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.6525       1.6824    -0.003
 Six-month bills               1.8375       1.8804    0.000
 Two-year note                 100-2/256    2.2458    -0.008
 Three-year note               99-144/256   2.4048    -0.016
 Five-year note                100-2/256    2.6232    -0.026
 Seven-year note               99-208/256   2.7797    -0.029
 10-year note                  99-32/256    2.8516    -0.031
 30-year bond                  97-208/256   3.1128    -0.038
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        29.25         0.75    
 spread                                               
 U.S. 3-year dollar swap        24.50         0.75    
 spread                                               
 U.S. 5-year dollar swap        12.50         0.75    
 spread                                               
 U.S. 10-year dollar swap        2.25         0.25    
 spread                                               
 U.S. 30-year dollar swap      -16.50         0.75    
 spread                                               
 
 (Reporting by Kate Duguid
Editing by Susan Thomas)
  
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