(Recasts, updates yields, adds improved market liquidity) By Karen Pierog CHICAGO, April 7 (Reuters) - Yields on longer-term U.S. Treasuries erased some early gains on Tuesday after a Wall Street rally sparked by hopes the coronavirus outbreak may be slowing fizzled out. The yield on the benchmark U.S. 10-year note was last up 5.8 basis points at 0.7359%, down from a session high of 0.785%. After rallying on Monday and being up most of Tuesday, stock indexes turned negative at the close. New York Governor Andrew Cuomo said on Tuesday that while his hard-hit state had its largest single-day increase in deaths, he believed the number of hospitalizations for the virus was reaching a plateau. "We've cheapened up a little bit because of the stronger push in risk appetite for the last couple of days, taking a bit of a bid out of Treasuries," said Kim Rupert, senior economist at Action Economics in San Francisco. She noted there is also "a ton of supply" coming at the bond market with Tuesday's auction of $25 billion of 10-year notes, followed by $17 billion of 30-year bonds on Wednesday, as well as an "astronomical amount" of debt needed to finance the $2.3 trillion federal CARES Act aimed at mitigating economic fallout from the virus. "That's going to keep yields from dropping precipitously, although there is not a precipitous amount they can drop anymore," Rupert said. Results from Tuesday's 10-year note auction were "underwhelming with a tail of 0.8 basis point and non-dealer bidding of 72.4% versus a 72.9% average," according to a report from Ben Jeffery, interest rate strategist at BMO Capital Markets. Meanwhile, some measures of liquidity in the $17 trillion Treasury market are almost back to normal, thanks to the Federal Reserve's giant purchases, but trading conditions remain challenging. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes that is seen as an indicator of economic expectations was at 45.8 basis points, about 5.4 basis points higher than at Monday's close. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was at 0.2795%, up less than a basis point. Bids submitted in a Tuesday morning overnight repurchase agreement (repo) operation totaled $1.5 billion backed by mortgage-backed securities, according to the New York Federal Reserve, which said it accepted all the bids. In a one-day repo operation on Tuesday afternoon, all $10.8 billion in bids were accepted. April 7 Tuesday 3:27PM New York / 2027 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1625 0.1653 0.031 Six-month bills 0.2 0.2035 0.034 Two-year note 100-50/256 0.2759 0.008 Three-year note 99-168/256 0.3653 0.012 Five-year note 100-26/256 0.4793 0.033 Seven-year note 99-224/256 0.6433 0.055 10-year note 107-64/256 0.7359 0.058 30-year bond 116-188/256 1.3199 0.035 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 24.25 2.25 spread U.S. 3-year dollar swap 14.75 1.25 spread U.S. 5-year dollar swap 11.75 0.75 spread U.S. 10-year dollar swap 5.00 1.25 spread U.S. 30-year dollar swap -38.00 5.25 spread (Reporting by Karen Pierog in Chicago Additional reporting by Ross Kerber in Boston; Editing by Tom Brown and Dan Grebler)
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