Bonds News

TREASURIES-Yields retreat, bills flirt with negative rates

 (Updates yields, adds Fed official's comment)
    By Karen Pierog
    CHICAGO, March 19 (Reuters) - U.S. Treasury yields eased on
Friday from more than one-year highs, while the shortest end of
the market flirted with negative rate territory as it tried to
absorb a flood of cash from the nation's massive fiscal stimulus
    The benchmark 10-year note yield was last down
less than a basis point at 1.7264%. On Thursday, it soared to
1.7540%, a level not hit since January 2020 before the
coronavirus pandemic sent yields and stocks crashing. 
    The 30-year bond yield also retreated after reaching 2.518%
on Thursday, its highest since August 2019. It was last 3.3
basis points lower at 2.4429%.
    The market largely shrugged off the Federal Reserve's
announcement on Friday that it would let a temporary bank
leverage rule exemption expire on March 31. 
    Meanwhile, dealers offered to sell Treasury bills due in
three months or less at negative rates, according to market
    Tradeweb reported that while bid yields for those bills did
not go negative, a few on the ask side did hit "very marginal
negative points this week." 
    Tom Simons, money market economist at Jefferies in New York,
said bill yields were flirting with negative rates, which were
last seen in March 2020.
    "When things are very cuspy, where bills are basically
trading at zero, occasionally a quote will pop up where it's
actually negative for a minute or two, but it doesn't really
trade there or doesn't really get captured on the recap data,"
he said.
    This week's yield spike on the longer end of the curve was
fueled by the Fed policy meeting, which boosted economic growth
expectations for 2021. Fed Chair Jerome Powell on Wednesday
repeated pledges to hold interest rates steady in an effort to
keep economic recovery on track even if inflation breached the
central bank's 2% target this year.
    The pullback in yields was not too surprising, according to
Ryan Swift, U.S. bond strategist at BCA Research in Montreal. 
    "Ultimately, what we’re seeing now is a great deal of
tension between market prices that embed several rate hikes
before the end of 2023 and the Fed’s forecast that doesn’t
expect liftoff until 2024," he said, adding that the conflicting
rate forecasts will lead to market volatility. 
    Richmond Federal Reserve Bank President Thomas Barkin told
CNBC on Friday that the central bank will not raise short-term
rates until the economy meets clear benchmarks.
    Some major bond managers raised concern that the market
could be viewed as disorderly if the recent pace of yield
increases that has seen the 10-year rise 80 basis points since
January continues. 
    BofA on Friday revised its end-of-year target for the
10-year yield to 2.15% from 1.75%.
    The Fed's announcement on the expiration of the leverage
rule exemption, put in place in April 2020 to ease stress in the
Treasury market due to the pandemic, means banks will have to
resume holding an extra layer of loss-absorbing capital against
their U.S. Treasuries and central bank deposits.
    Justin Lederer, Treasury analyst at Cantor Fitzgerald in New
York, said the Fed's move had already been priced into the
    "Dealer Treasury holdings have fallen off sharply over the
last few weeks, so I think it already took place," he said. "The
actual headline was just noise."
    Looking ahead to next week, the Treasury will offer $60
billion of two-year notes on Tuesday, $61 billion of five-year
notes on Wednesday, and $62 billion of seven-year notes on
    Lederer said the five- and seven-year note auctions could be
tone setters for the market in terms of participation from
    "That could be a sign of whether we hit levels that are
supportive if you see some decent sponsorship," he said.
    The two-year Treasury yield, which typically
moves in step with interest rate expectations, was last down 1.2
basis points at 0.1472%. 
    A closely watched part of the yield curve, which measures
the gap between yields on two- and 10-year Treasury notes
, was 2.63 basis points steeper from Thursday's
close at 157.38 basis points.
    March 19 Friday 3:57PM New York / 1957 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.015        0.0152    0.000
 Six-month bills               0.025        0.0254    -0.008
 Two-year note                 99-245/256   0.1472    -0.012
 Three-year note               99-198/256   0.3264    -0.011
 Five-year note                98-44/256    0.8789    0.012
 Seven-year note               98-104/256   1.3664    0.007
 10-year note                  94-140/256   1.7264    -0.003
 20-year bond                  92-124/256   2.3499    -0.029
 30-year bond                  88           2.4429    -0.033
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        11.25         1.25    
 U.S. 3-year dollar swap        12.25         2.00    
 U.S. 5-year dollar swap         9.50         1.75    
 U.S. 10-year dollar swap        1.50         2.75    
 U.S. 30-year dollar swap      -26.50         3.75    
 spread (Reporting by Karen Pierog; Additional reporting by Gertrude
Editing by Kirsten Donovan, Susan Fenton and Sonya Hepinstall)