May 2, 2018 / 6:54 PM / a year ago

TREASURIES-U.S. yields dip after quarterly refunding, Fed statement

    * U.S. ADP report shows private-sector job gains of 204,000 
    * U.S. 2-year yields hit 9-1/2-year peak
    * U.S. Treasury to raise debt auction size

 (Adds Fed statement, comment, updates prices in text, table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 2 (Reuters) - U.S. Treasury yields for most
maturities fell on Wednesday as a quarterly refunding program
that aims to finance the country's massive fiscal deficit came
in short of expectations, reducing the pressure on prices caused
by the increase in debt supply.
    Treasury yields had risen overnight in the run-up to the
refunding announcement. While the U.S. Treasury did increase the
size of the auctions, analysts said the overall outcome was
somewhat underwhelming.
    "There are no TIPS (Treasury Inflation Protected Security)
increases, which tends to reduce the effective duration of the
forward auctions," said Jim Vogel, interest rates strategist, at
FTN Financial in Memphis, Tennessee.
    "Second, the increases from the 5s through 30s were modest
compared to the upper band of expectations," he added.
    Yields, however, came off their lows after the Federal
Reserve held interest rates steady at its monetary policy
meeting, and said inflation was close to its 2 percent target.

    Investors expect the Fed to raise interest rates in June.
    "I think a June rate hike is a done deal unless something
dramatically changes between now and June," said Stephen
Stanley, chief economist at Amherst Pierpont Securities in
Stamford, Connecticut. 
    The biggest driver though of the U.S. Treasury market on
Wednesday was still the refunding announcement.
    Treasury announced a $73-billion refunding package for May,
up from the $66 billion in February, with the bulk of the
increase coming from short-end maturities. Treasury will sell
$31 billion in 3-year notes, $25 billion in 10-year notes, and
$17 billion in 30-year bonds.
    Treasury will raise the size of the 2- and 3-year note
auctions by just $1 billion per month in the second quarter,
compared with the $2 billion increases in the first. 
    The refunding announcement overshadowed a U.S.
private-sector payrolls for April that landed roughly in line
with forecasts.
    Before the release of the private payrolls data, yields on
the U.S. two-year note, the maturity most sensitive to the rate
increase outlook, hit their highest in more than nine years. 
    Payrolls processor ADP said U.S. private-sector employment
grew by 204,000 last month, slightly exceeding expectations of
200,000 jobs.
    Next up, market participants are looking to U.S. nonfarm
payrolls data due out on Friday. Analysts are expecting an
addition of 192,000 jobs, according to a Reuters poll.
    In afternoon trading, U.S. 10-year yields were at 2.970
percent, down from 2.976 percent late on Tuesday. 
    U.S. 30-year yields, however, slid to 3.136 percent 
, from Tuesday's 3.137 percent.
    On the front end of the curve, U.S. two-year yields hit a
9-1/2-year high of 2.521 percent. They were last at
2.5012 percent.
   Wednesday, May 2 at 1438 EDT (1838 GMT):
 US T BONDS JUN8               143-4/32     -0-1/32   
 10YR TNotes JUN8              119-120/256  0-24/256  
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.8025       1.8359    -0.018
 Six-month bills               1.98         2.0278    -0.008
 Two-year note                 99-194/256   2.5003    -0.012
 Three-year note               99-64/256    2.6406    -0.011
 Five-year note                99-190/256   2.8057    -0.015
 Seven-year note               99-176/256   2.9247    -0.012
 10-year note                  98-36/256    2.97      -0.006
 30-year bond                  97-68/256    3.1419    0.005
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        26.75         1.75    
 U.S. 3-year dollar swap        22.00         0.75    
 U.S. 5-year dollar swap        12.00         1.00    
 U.S. 10-year dollar swap        3.00         0.25    
 U.S. 30-year dollar swap      -11.50         0.00    
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by James Dalgleish)
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