April 20, 2018 / 3:22 PM / a year ago

TREASURIES-Bond selloff lifts 10-year yield to month high, curve steepens

    By Kate Duguid
    NEW YORK, April 20 (Reuters) - The 10-year Treasury yield
reached its highest level since March 21 as a bond selloff
continued for a second day, driving the yield curve steeper
after two weeks of flattening. 
    The move looks to be reflective of a structural or technical
shift in the market, rather than a jump in investor confidence
in the U.S. economy or rising inflation. As such, analysts,
regardless of whether they expect the curve would invert in
2018, believe the current steepening is a temporary move.
    "In the last few days there has been pressure (on the bond
market) and I think it has to do with funding issues, a
reallocation based on repatriation of dollars," said Lou Brien,
market strategist at DRW Trading in Chicago, Illinois. "I don't
think bonds are reacting to stocks, I don't think they're
reacting to heightened inflation expectations."   
    President Donald Trump's administration has incentivized
American companies to repatriate their cash. If a company that
had been holding money abroad in the form of Treasuries did
repatriate those funds, it may then use them to reinvest in the
company, pay dividends, or make shorter-term investments rather
than to buy Treasuries again.   
    The 10-year Treasury yield was last at 2.940
percent, a monthly high, though still below the 2.957 percent of
Feb. 21, which was the highest level since January 2014. 
    The increase in supply of Treasury bills, with auctions of
the two-year, five-year and seven-year bonds next week, will
continue to flatten the curve. Tamping down prices at the front
end will be the increase at auction of two-year fixed-rate debt
to $32 billion, the most sold for this maturity in four years. 
    Supply has increased in part because the Republican
government's tax bill is expected to add $1.5 trillion to the
federal debt load. In addition, the Fed is winding down the
amount of debt it buys, ending its crisis-era policy. Together,
the tax bill and the Fed's updated balance sheet added
significantly to the amount of debt the United States must sell
in 2018. 
    Because of that increased supply, even analysts who do not
believe the yield cure will invert this year, do not necessarily
think it will continue to steepen. 
    "We don't feel that this yield curve flattening is a
precursor to a recession," said Eric Souza, senior portfolio
manager at Silicon Valley Bank in San Francisco, California. 
    But, he admitted, the yield curve is likely to continue to
flatten. "In a normal rising rate environment you would have a
flat yield curve. We saw this recently in the 2004-2006 time
frame," he said.
    The two-year Treasury yield was last at 2.453
percent, above its last close. The 30-year Treasury yield
 was last at 3.129, also above its close on Thursday.

    April 20 Friday 11:05AM New York / 1505 GMT
 US T BONDS JUN8               143-11/32    -0-14/32  
 10YR TNotes JUN8              119-172/256  -0-40/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.79         1.8227    -0.003
 Six-month bills               1.9675       2.0144    0.004
 Two-year note                 99-158/256   2.4532    0.017
 Three-year note               99-90/256    2.6026    0.015
 Five-year note                98-186/256   2.7776    0.018
 Seven-year note               98-84/256    2.8926    0.023
 10-year note                  98-104/256   2.9378    0.024
 30-year bond                  97-132/256   3.1286    0.024
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        28.00        -0.50    
 U.S. 3-year dollar swap        22.00        -0.50    
 U.S. 5-year dollar swap        11.75         0.00    
 U.S. 10-year dollar swap        3.25         0.50    
 U.S. 30-year dollar swap      -13.00         0.50    
 (Reporting by Kate Duguid; Editing by Bernadette Baum)
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