February 15, 2018 / 3:58 PM / 3 months ago

TREASURIES-U.S. yields edge lower, but uptrend remains intact

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 15 (Reuters) - U.S. Treasury yields slipped on
Thursday after sizable gains in recent sessions, as investors
took a breather from selling bonds and readjusted positions to
prepare for more inflation-related volatility, a scenario that
could take yields even higher.
    U.S. benchmark 10-year yields, which move inversely to
prices, earlier hit a fresh four-year high of 2.944 percent,
before pulling back. So far this year, 10-year yields have
climbed nearly 50 basis points.
    U.S. two-year yields, the maturity most sensitive to rate
hike expectations, also came off from nine-year peaks.
    "The market is continuing to build a cushion against
inflation volatility and further selling, whether the selling
comes in the secondary markets or whether the selling comes from
higher Treasury issuance," said Jim Vogel, interest rates
strategist, at FTN Financial in Memphis, Tennessee.
    Tuesday's economic data had little impact on the Treasury
market, but it did affirm the rising infation trend with gains
in U.S. producer prices. Other reports such as the
higher-than-expected Philadelphia Federal Reserve manufacturing
index, also supported the economy's stable growth path.

    Fed fund futures continue to price in a more than 80 percent
chance the Fed will raise interest rates at next month's
monetary policy meeting, and a 60 percent possibility of further
tightening in June.
    "When we came into this year, the four-rate hike scenario
was popular but not the consensus. Today, it's almost a full
consensus," said Vogel.
    In mid-morning trading, U.S. benchmark 10-year Treasury note
yields fell to 2.899 percent, from 2.913 percent
late on Wednesday. Earlier in the session, 10-year yields hit a
more than four-year peak of 2.944 percent.
    Investors braced for the 3-percent level on 10-year yields.
Many in the market believe it's just a matter of time before it
hits 3 percent, but Ian Lyngen, head of U.S. rates strategy at
BMO Capital Markets believes it will not stay there for long.
    "We're content to rely on the obvious parallels between the
first quarter of 2018 and the Q1s of the last five years: the
beginning of every year represents the point at which investors
invariably hold the most ambitious growth and inflation
assumptions," he added.
    That optimism, Lyngen, said is not likely to last.     
    U.S. 30-year yields dropped to 3.123 percent
from Wednesday's 3.177 percent.
    U.S. 2-year yields, meanwhile rose to 2.184
percent, compared with 2.172 percent on Wednesday. Two-year
yields earlier hit a more than nine-year peak of 2.213 percent
earlier in the session.
    
      February 15 Thursday 10:46AM New York / 1546 GMT
                               Price                  
 US T BONDS MAR8               144-9/32     0-29/32   
 10YR TNotes MAR8              120-120/256  0-36/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.5625       1.5904    0.002
 Six-month bills               1.78         1.821     0.018
 Two-year note                 99-166/256   2.1844    0.012
 Three-year note               99-144/256   2.4021    0.005
 Five-year note                98-202/256   2.6371    -0.003
 Seven-year note               98           2.8185    -0.017
 10-year note                  98-204/256   2.8894    -0.024
 30-year bond                  97-156/256   3.1233    -0.054
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        27.00        -0.25    
 spread                                               
 U.S. 3-year dollar swap        19.50         0.75    
 spread                                               
 U.S. 5-year dollar swap        10.00         0.50    
 spread                                               
 U.S. 10-year dollar swap        1.75         0.50    
 spread                                               
 U.S. 30-year dollar swap      -14.75         1.75    
 spread                                               
 
    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrew Hay)
  
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