January 22, 2018 / 4:05 PM / a year ago

TREASURIES-U.S. 10-year yields hit 3-1/2-year high, shrug off shutdown

    * 10-year yields hit highest since July 2014 before
    * U.S. government shutdown begins third day

    By Kate Duguid
    NEW YORK, Jan 22 (Reuters) - Benchmark Treasury yields hit
their highest in more than three years on Monday, as investors
largely shrugged off a U.S. government shutdown, anticipating it
will not have a significant long-term impact on the world's
largest economy.
    Both Republicans - who control the White House and Congress
- and Democrats are expected to face pressure to allay any
economic pressure that results from the shutdown, so it is
likely that most short-term federal spending cuts will be
followed by added spending in the future. 
    "I don't think the shutdown matters a lot," said Ward
McCarthy, chief financial economist at Jefferies LLC in New
York. "It would have more effect on the market if it were
intertwined with the debt ceiling, but for the time being that
does not appear to be the case," he added.     
    Hundreds of thousands of federal workers began shutting down
operations on Monday, as a bipartisan group of senators tried to
negotiate a deal just hours before the full Senate planned
another vote on restoring funding for the federal government.
The shutdown began at midnight on Friday.
    Benchmark government yields hit 2.672 percent,
the highest since July 2014, but was last at 2.643 percent,
slightly higher from Friday's 2.639 percent. The 10-year
maturity on Friday broke through its 2017 high of 2.64 percent,
a key technical support level. 
    Reaching that key technical level means that yields at or
below 2.64 percent may indicate the market will hold those rates
in the near term. If they move above that level, the market will
probably test the next highest mark of 2.710 percent, or 2.808
percent, which offers the strongest support in a sell-off.
    On Monday morning the market had "a little bit of a bounce
from last Friday, which was a pretty ugly day," said Jefferies'
McCarthy, before the sell-off slowed. 
    If Congress fails to pass a funding bill by the end of
January, the biggest economic impact of the shutdown will be on
the Federal Reserve. Data collection by agencies such as the
Bureau of Labor Statistics may be disrupted and therefore make
the final reported results for the period inaccurate. 
    What's more, "a Fed that hikes despite a missing or
unreliable nearby inflation or employment print(s) will
choreograph a much steeper reaction function than it may intend
to," said a note by Ian Lyngen, head of U.S. rates strategy at
BMO Capital Markets in New York. 
    This week's schedule of data releases is light until Friday,
when the first estimate of fourth-quarter gross domestic product
will be reported.
    In mid-morning trading, the U.S. 2-year note yield
 was at 2.061 percent, after hitting 2.082 percent
earlier in the day, its highest since September 2008.
      January 22 Monday 10:03AM New York / 1503 GMT
 US T BONDS MAR8               148-26/32    -0-6/32   
 10YR TNotes MAR8              122-52/256   -0-20/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.41         1.4344    0.000
 Six-month bills               1.595        1.6299    0.005
 Two-year note                 99-162/256   2.0691    0.008
 Three-year note               99-108/256   2.2015    0.011
 Five-year note                98-130/256   2.4476    0.012
 Seven-year note               97-236/256   2.579     0.010
 10-year note                  96-144/256   2.65      0.011
 30-year bond                  96-156/256   2.921     0.009
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        19.75         0.00    
 U.S. 3-year dollar swap        19.00        -0.25    
 U.S. 5-year dollar swap         6.75        -0.75    
 U.S. 10-year dollar swap        3.00        -2.50    
 U.S. 30-year dollar swap      -13.25        -2.50    

 (Reporting by Kate Duguid; Editing by Frances Kerry)
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