February 1, 2018 / 8:51 PM / in 3 months

TREASURIES-U.S. bond market rout bleeds into February

    * U.S. 30-year yield breaks above 3 pct for first time since
May
    * U.S. economy expanding at 5.4 pct in Q1 - Atlanta Fed
    * Further yield curve flattening is expected to resume
    * U.S. Treasuries posted worst month in over a year

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Feb 1 (Reuters) - The U.S. Treasuries market
started February on a sour note with the 10-year yield hitting a
near four-year peak on Thursday as investors booked profits on
curve-related bets ahead of Friday's jobs report.
    U.S. government bonds came off their worst month since
November 2016. They produced nearly a 1.4 percent loss
 in January, according to an index compiled by
Bloomberg and Barclays.
    On Wednesday, the spread between longer-dated yields and
short-dated ones also contracted to the tightest level in over a
decade after the U.S. Treasury Department favored selling more
short-dated debt than longer-dated issues to finance the
projected rise in its budget deficit.
    Expectations the Federal Reserve would raise interest rates
further in 2018 due to an improving economy stoked the allure of
curve-flattening trades last month.
    The spread between five-year and 30-year Treasury yields
widened to 44 basis points, a day after it touched nearly 41
basis points, a level not seen since August 2007, according to
Tradeweb.    
    On the other hand, Mike Lorizio, head of Treasuries trading
at Boston-based Manulife Asset Management, said he expects the
curve-flattening move to resume once the profit-taking subsides.
    "Further flattening of the curve seems inevitable with the
supply coming and more Fed rate hikes," he said.
    The Treasury said on Wednesday it planned faster growth in
two-year and three-year debt issuance versus the rise in
longer-dated supply.
    Benchmark 10-year Treasury yields reached a
fresh near four-year high at 2.786 percent. It was last at 2.784
percent, up 6 basis points on the day, Reuters data showed.
    The 30-year bond yield rose above the 3 percent
mark to its highest level since last May.
    Despite the spike in longer-dated yields, analysts said a
further increase will likely be limited by buying from
bargain-minded investors.
    "Long-end yields will still be very well-behaved," said Matt
Freund, head of fixed income strategies at Calamos Investments
in Chicago.
 
    On the data front, the Institute for Supply Management said
its index on U.S. manufacturing activity slipped less than
expected to 59.1 in January.
    The Commerce Department reported construction spending grew
0.7 percent to a record high of $1.25 trillion in December.
    Solid readings on manufacturing and investments led the
Atlanta Federal Reserve to lift its estimate on gross domestic
product for the first quarter to 5.4 percent, which would be the
strongest quarter growth reading since late 2009.
    Still traders await the government payrolls report due at
8:30 a.m. (1330 GMT) on Friday, which may reinforce expectations
on whether wage growth is gaining traction amid a tight labor
market, analysts said.
  February 1 Thursday 3:26PM New York / 2026 GMT
                               Price                   
 US T BONDS MAR8               146-11/32    -1-15/32   
 10YR TNotes MAR8              121-40/256   -0-108/25  
                                            6          
                               Price        Current    Net
                                            Yield %    Change
                                                       (bps)
 Three-month bills             1.4675       1.4934     0.028
 Six-month bills               1.61         1.6457     -0.018
 Two-year note                 99-176/256   2.1609     0.016
 Three-year note               99-24/256    2.3194     0.030
 Five-year note                99-26/256    2.5678     0.042
 Seven-year note               98-156/256   2.7197     0.057
 10-year note                  95-116/256   2.784      0.064
 30-year bond                  94-208/256   3.015      0.074
                                                       
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
                                            Change     
                                            (bps)      
 U.S. 2-year dollar swap        19.25         0.50     
 spread                                                
 U.S. 3-year dollar swap        18.25         0.00     
 spread                                                
 U.S. 5-year dollar swap         8.00         0.75     
 spread                                                
 U.S. 10-year dollar swap        3.25         0.50     
 spread                                                
 U.S. 30-year dollar swap      -12.25         0.25     
 spread                                                
 
    

    
 (Reporting by Richard Leong
Editing by Chizu Nomiyama)
  
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