TREASURIES-Yields fall, but come off lows as banks in focus

 (Adds comments from Fed officials, details, updates prices)
    By Karen Brettell
       NEW YORK, March 24 (Reuters) - U.S. Treasury yields came
off six-month lows reached earlier on Friday but remained lower
on the day as concerns about further stress in the banking
sector led investors to seek out the safe haven debt.
    Bank concerns turned to European giants Deutsche Bank and
UBS on Friday as investors worried that regulators and central
banks have not yet contained the worst shock to the sector since
the 2008 global financial crisis.
    Unease over the impact of higher rates on the beleaguered
banking sector is leading investors to expect more dovish
monetary policy going forward, and pulling yields lower.
    “The fact that the Fed was so dovish on Wednesday, which was
a result of the volatility we’ve seen in the financial sector
... has definitely been the big reason why we’ve seen this big
bull steepening of the curve as the impact of monetary policy
tightening starts to show up in the banking sector,” said Ben
Jeffery, an interest rate strategist at BMO Capital Markets in
New York.
    The Federal Reserve on Wednesday raised interest rates by a
quarter of a percentage point, but indicated it was on the verge
of pausing further increases in borrowing costs after the recent
collapse of two U.S. banks. 
    Benchmark 10-year note yields fell as low as
3.285%, the lowest since Sept. 12, before rising back to 3.378%
Two-year yields reached 3.555%, the lowest since
Sept. 13, and were last 3.777%.
    The inversion in the closely watched yield curve between
two-year and 10-year notes narrowed to minus 27
basis points, before widening back to minus 40 basis points.
    Fed funds futures traders are now pricing in only an 24%
chance that the Fed will hike rates by an additional 25 basis
points in May, and an 76% probability it will leave the rate
unchanged at 4.75% to 5.0% They also see the Fed cutting rates
to 3.94% by December.
    Fed officials on Friday said there was no indication
financial stress was worsening as they gathered at a policy
meeting this week, a fact that allowed them to stay focused on
lowering inflation with another interest rate increase.
    St. Louis Fed President James Bullard also said that the
U.S. central bank will likely need to raise interest rates
higher than expected, and Atlanta Fed President Raphael Bostic
said that the Fed's main job must remain focused on getting
inflation lower.
    Still, analysts expect bank concerns to be the main driver
of market moves in the near-term.
    “All we are doing right now, almost literally, is trading
bank stocks via Treasuries,” said Jim Vogel, an interest rate
strategist at FHN Financial in Memphis.
    “If you turn your computer off and turn it back on, it
reboots in five minutes. If you unplug the valuation system for
an entire sector of the stock market, you don’t plug it back in,
it has to reboot over a long period of time, and unfortunately
banks have to report their earnings and so everyone is going to
hold their breath and buy more Treasuries until we start to see
actual results from banks,” Vogel said.
    Investors have been on edge since the collapse of U.S.
lenders Silicon Valley Bank and Signature Bank in mid-March,
which was followed by the emergency UBS purchase of its ailing
rival Credit Suisse on Sunday.
    U.S. Treasury Secretary Janet Yellen on Thursday sought to
reassure jittery investors that American bank deposits were safe
and promised policymakers had more firepower to battle any
crisis even as bank stocks resumed their slide.
    Data on Friday showed that new orders for key
U.S.-manufactured capital goods unexpectedly rose in February,
but data for the prior month was revised sharply down,
suggesting that business spending on equipment could be
struggling to rebound in the first quarter.
      March 24 Friday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.565        4.68      0.009
 Six-month bills               4.5725       4.7562    -0.015
 Two-year note                 101-143/256  3.7772    -0.029
 Three-year note               102-228/256  3.5889    -0.014
 Five-year note                102-170/256  3.4075    -0.010
 Seven-year note               103-168/256  3.4027    -0.020
 10-year note                  101-4/256    3.378     -0.026
 20-year bond                  101-100/256  3.7747    -0.039
 30-year bond                  99-160/256   3.6455    -0.036
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        31.00         0.75    
 U.S. 3-year dollar swap        17.25        -0.75    
 U.S. 5-year dollar swap         8.50        -1.00    
 U.S. 10-year dollar swap       -0.50        -1.00    
 U.S. 30-year dollar swap      -46.50        -1.00    
 spread (Reporting by Karen Brettell; Additional reporting by Harry
Robertson and Dhara Ranasinghe in London; Editing by Jonathan
Oatis and Nick Zieminski)