May 23, 2018 / 1:32 PM / 5 months ago

TREASURIES-Yields fall as Turkish lira sell-off sparks safety bid

* Turkish fears boosts safety bid for U.S. bonds

* Treasury to sell $36 bln five-year notes

* Fed to release minutes from May meeting

By Karen Brettell

NEW YORK, May 23 (Reuters) - U.S. Treasury yields fell on Wednesday as concerns about the tumbling Turkish lira boosted demand for lowd-risk debt, and before the Treasury Department will sell $36 billion in 5-year notes, the second sale of $99 billion in coupon-bearing supply this week.

The Turkish lira dropped more than 5 percent before recovering some ground, the latest sell-off that reflects growing investor alarm over the direction of monetary policy under President Tayyip Erdogan.

A self-described “enemy of interest rates,” Erdogan wants borrowing costs lowered to spur credit growth and construction, and said last week he would seek greater control over monetary policy after elections set for June 24.

There are concerns about “the possibility of capital controls and other things when June comes around,” said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. “People thought it would be contained this time, there was a lot of confidence in that view. It caused a change in expectations to hit all the markets hard.”

Benchmark 10-year note yields fell to 3.019 percent, down from 3.054 percent on Tuesday. The yields are down from an almost seven-year high of 3.128 percent on Friday.

Renewed demand for U.S. Treasuries may help the government sell new 5-year notes on Wednesday.

The U.S. sold $33 billion in 2-year notes to fair demand on Tuesday, though dealers took 45.37 percent of the sale, their largest share since December 2016.

The Treasury has been increasing the size of its auctions because the government faces higher debt needs due to its growing deficit and spending increases, and because it needs to make up for declining purchases by the Federal Reserve.

Large dealers have had to absorb much of this increase as demand from other investors has failed to make up for the increase in supply.

The 5-year note auction size has increased from $34 billion in January.

The government will also sell $30 billion in 7-year notes on Thursday, in addition to $16 billion in 2-year floating rate notes on Wednesday.

The Fed’s minutes for its May meeting on Wednesday will also be evaluated for indications of how many rate hikes are likely this year.

The U.S. central bank left rates unchanged at the meeting and expressed confidence that a recent rise in inflation to near its target would be sustained, leaving it on track to raise borrowing costs in June. (Reporting by Karen Brettell; editing by Jonathan Oatis) )

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