(Adds details on yield curve, analyst comment, updates prices) By Karen Brettell NEW YORK, Nov 20 (Reuters) - U.S. Treasuries pared an overnight yield drop but ended lower on the day in choppy trading on Friday as investors balanced the prospect of new fiscal stimulus against the request by the U.S. government for the Federal Reserve to return unused funds from programs meant to backstop markets. Yields dropped after U.S. Treasury Secretary Steven Mnuchin late on Thursday said the $455 billion allocated to Treasury under the CARES Act last spring, much of it set aside to support Federal Reserve lending to businesses, non-profits and local governments, should be instead available for Congress to reallocate. The yields gave back much of the drop as analysts said that the move was unlikely to have systemic consequences for markets. “It is good for the Fed to have these facilities in their back pocket and that’s where they’ve effectively been over the last couple of months, but it’s not catastrophic here and now,” said Padhraic Garvey, regional head of research, Americas, at ING. Optimism that the U.S. government may still agree to new stimulus also helped to push the yields off their lows. Mnuchin on Friday said that Congress should use the money to help small U.S. companies with grants instead and that he and White House Chief of Staff Mark Meadows would speak with congressional Republican leaders later Friday and would redouble their efforts to pass further stimulus measures. Benchmark 10-year yields fell to an 11-day low of 0.818%, before bouncing back to 0.829%. The yields are down from an eight-month high of 0.975% last week, when supply and optimism over vaccines pushed the rates higher, and have now retraced almost all of that spike. The yield curve between two-year and 10-year notes also reached its flattest levels since Nov. 9 at 65 basis points, before steepening back to 67 basis points. Thirty-year bonds outperformed with the spread between yields on five-year notes and 30-year bonds compressing to 115 basis points, the smallest gap since Sept. 29. The timing of Mnuchin’s request raised some concerns that funding markets could be more vulnerable to a reduction in liquidity heading during the crucial year-end period, when many market participants reduce their lending. But Blake Gwinn, a strategist at NatWest Markets, said on Friday that “this shouldn't be a huge deal for funding,” adding that “liquidity conditions are stable in most of the markets these were originally targeted at.” The cost of borrowing against Treasury collateral in the overnight repurchase agreement (repo) market was stable on Friday at 7 basis points. The three-month London interbank offered rate continued to drift lower, setting a fresh record of 20.49 basis points. Investors are focused on next month's Fed meeting for any indications that the U.S. central bank could expand its longer-dated bond purchases if the yields rise back above last week's highs and stay elevated. Chicago Federal Reserve Bank President Charles Evans said on Friday that the Fed's $120 billion monthly purchases could be enhanced if needed, but signaled that he would be looking to springtime to have a better notion of what the economy would need. November 20 Friday 3:00PM New York / 2000 GMT Price US T BONDS DEC0 174-2/32 0-26/32 10YR TNotes DEC0 138-128/256 0-36/256 Price Current Net Yield % Change (bps) Three-month bills 0.0675 0.0684 0.002 Six-month bills 0.0925 0.0938 0.000 Two-year note 99-237/256 0.1634 -0.006 Three-year note 100-28/256 0.2131 -0.011 Five-year note 99-100/256 0.3747 -0.011 Seven-year note 99-68/256 0.6083 -0.016 10-year note 100-112/256 0.8292 -0.026 20-year bond 100-188/256 1.333 -0.043 30-year bond 102-64/256 1.5311 -0.047 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.75 0.50 spread U.S. 3-year dollar swap 8.00 0.50 spread U.S. 5-year dollar swap 6.50 0.50 spread U.S. 10-year dollar swap -0.50 -0.50 spread U.S. 30-year dollar swap -32.00 -0.25 spread (Editing by Nick Zieminski and Sonya Hepinstall)
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