June 11, 2020 / 8:09 PM / 24 days ago

TREASURIES-Yields fall as yield curve control remains in question

 (Recasts, updates yields, adds Fed funds futures, analyst
comment, results of bond auction)
    By Karen Pierog
    CHICAGO, June 11 (Reuters) - U.S. Treasury yields continued
their downward trajectory on Thursday amid uncertainty over
whether the Federal Reserve would turn to yield curve control in
the coming months, while the prospect of negative interest rates
seeped back into the market.
   With a nosedive in stocks signaling that investors are
growing wary of risk, yields on the long end of the curve fell
the most. The benchmark 10-year yield was last down
9 basis points at 0.6576%.  
    Traders resumed betting on the Fed funds rate going below
zero, with some futures contracts rising back to 100 or
slightly above after retreating from similar levels last week
amid market optimism that the economic hit from the coronavirus
pandemic would not be as bad as feared.
    On Wednesday, Fed Chairman Jerome Powell said policymakers
had a full discussion about employing yield curve controls, but
for now would continue with the Fed's current level of purchases
of Treasury bonds and mortgage-backed securities.
    Tom Simons, money market economist at Jefferies in New York,
said of yield curve control that while "we do seem to be heading
in that direction, nothing that we got from the Fed yesterday
really suggests that it's a particularly near-term prospect." 
    Under yield curve control, the Fed would target a particular
yield and buy enough bonds to keep the rate from rising above
that target level. The Fed has adopted yield curve caps only
once before, to assist the Treasury in financing the cost of
World War Two. 
    Michael Kushma, chief investment officer of global fixed
income at Morgan Stanley Investment Management in New York, said
the move was unlikely unless "the economy fails to respond and
Treasury yields end up being higher than desired."
    "It will probably only be at the shorter end of the yield
curve. They'll extend out from the overnight rate, the Fed funds
rate out to two years or three years," Kushma added.
    Expectations that the Fed will cap short-dated Treasury
yields had increased demand for trades that benefit from yield
curve steepening. Investors are betting that short-term rates
will be held down by the Fed's low rate policy, while long-dated
debt will be hurt by improving economic expectations and
increasing Treasury supply.
    A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year Treasury
notes, which is viewed as an indicator of
economic expectations, was at 47.40 basis points, about 8 basis
points lower than at Wednesday's close.
    It reached 72 basis points on Friday, the steepest since
March, after data showed the U.S. economy unexpectedly added
jobs in May.
    Meanwhile, the Treasury sold $19 billion of 30-year bonds at
a high yield of 1.45% and with a bid-to-cover ratio of 2.3
times. 
    Kushma said the sale was helped by "a pretty big short base
heading into the auction" and the risk-off behavior in stocks. 
    The 30-year yield was last down 11.5 basis
points  at 1.4046%.
    June 11 Thursday 2:24PM New York / 1924 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.1725       0.1755    0.003
 Six-month bills               0.18         0.1827    -0.002
 Two-year note                 99-226/256   0.1847    0.006
 Three-year note               100-24/256   0.2186    0.003
 Five-year note                99-180/256   0.3103    -0.027
 Seven-year note               99-248/256   0.5046    -0.059
 10-year note                  99-176/256   0.6576    -0.090
 20-year bond                  98-240/256   1.185     -0.114
 30-year bond                  96-60/256    1.4046    -0.115
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         7.50        -1.00    
 spread                                               
 U.S. 3-year dollar swap         4.75        -1.50    
 spread                                               
 U.S. 5-year dollar swap         4.50        -1.25    
 spread                                               
 U.S. 10-year dollar swap       -1.00        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -47.75        -1.50    
 spread                                               
                                                      
 
 (Reporting by Karen Pierog; Editing by Dan Grebler and Will
Dunham)
  
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