(Updates yields; adds 30-year yield, Fed minutes) By Karen Pierog CHICAGO, May 20 (Reuters) - U.S. Treasury yields slipped on Wednesday after a somewhat underwhelming debut of the first 20-year bond in decades left the market uncertain how the new government financing tool will fit in. The benchmark 10-year yield was last down 2.6 basis points at 0.685%, just below its level before the sale results were announced and extending a decline from Tuesday's late levels. For the first time since 1986, the U.S. Treasury sold $20 billion in 20-year bonds at a high yield of 1.22%. The bid-to-cover ratio, a metric of overall demand, was 2.53. Primary dealers, who must absorb any supply not bought by direct and indirect buyers, took 24.6% of the deal. The 20-year joins the Treasury's debt toolbox in financing trillions of dollars in U.S. stimulus spending aimed at combating the fallout from the COVID-19 pandemic. Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee, said the market was treating the 20-year bond like "the new kid." "It will likely take 3-4 months or a significantly steeper curve to fold new (20-year bonds) better into the Treasury complex...to where they're no longer just the kid brother of the 30-year (bonds)," he wrote in commentary following the auction. The auction was "pretty decent" even though there was a small tail, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York, noting the when-issued yield of 1.215% heading into the auction was slightly lower. More 20-year bonds are coming as a total of $54 billion is expected over three months. Rajappa said the question will be "how much demand you're going to see on a consistent basis." Minutes from the Federal Reserve's April meeting indicated policymakers were sticking to their pledge to keep interest rates near zero until the U.S. economy gets back on track. Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York, said given that Fed officials, including Chair Jerome Powell, have been speaking publicly a lot lately, "there was nothing of a surprise there." The 30-year bond yield tumbled 3.2 basis points to 1.4037%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was last down a basis point at 0.1633%. Bids submitted in a Wednesday morning overnight repurchase agreement (repo) operation totaled $7 billion, according to the New York Federal Reserve, which said it accepted all the bids. May 20 Wednesday 2:29PM New York / 1929 GMT Price Price Current Net Yield % Change (bps) Three-month bills 0.12 0.122 -0.007 Six-month bills 0.145 0.1471 -0.008 Two-year note 99-237/256 0.1633 -0.010 Three-year note 99-190/256 0.2117 -0.008 Five-year note 100-48/256 0.3367 -0.011 Seven-year note 99-216/256 0.5229 -0.018 10-year note 99-108/256 0.685 -0.026 30-year bond 96-64/256 1.4037 -0.032 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.50 -0.25 spread U.S. 3-year dollar swap 5.50 0.00 spread U.S. 5-year dollar swap 3.00 -0.25 spread U.S. 10-year dollar swap -1.75 0.75 spread U.S. 30-year dollar swap -47.25 1.00 spread (Reporting by Karen Pierog in Chicago; Editing by Alden Bentley and Leslie Adler)
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