July 13, 2020 / 7:52 PM / in 22 days

TREASURIES OUTLOOK-Yields pare early rise, steepening trades still in vogue

(Recasts with price move, adds quote, updates prices)

By Karen Brettell

NEW YORK, July 13 (Reuters) - Long-dated U.S. Treasury yields pared an early increase on Monday as stocks came off their highs, though analysts expect investors to keep putting on bets that the U.S. yield curve will steepen.

Yields rose early in the session as stocks climbed, with the Nasdaq hitting a fresh intraday record high.

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia, said that dollar performance is driving activity, with demand for U.S. assets increasing with weakness in the greenback.

“We moved from a pretty significant sell-off in the morning (in bonds), to a slight rally by midday, and the sector which seemed to trigger that was weakness in the dollar,” he said.

The dollar index measuring the greenback against a basket of currencies was last down 0.14% on the day at 96.50, after earlier going as low as 96.27.

Investors have been using a recent decline in bond yields as an opportunity to reset bets that long-dated yields will rise, and to re-enter trades that benefit from a steeper yield curve.

“Today what it appears is some people are using the current opportunity to either re-establish shorts, or re-establish steepener positions,” said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.

Bets that the yield curve will steepen have increased as Federal Reserve policy holds shorter-dated debt yields near record lows, while long-dated yields are vulnerable to improving economic conditions.

Analysts at Goldman Sachs on Saturday recommended shorting 10-year notes, saying that “without the Fed opening up to negative rates, (they) don’t really have a lot of room to rally much further.”

This comes even as new shutdowns meant to halt the spread of the coronavirus threaten further economic damage.

“Mitigation measures used to contain the outbreak are unlikely to be as far-reaching as those adopted in March/April, which means that the economic impact of the rising case count is likely to be significantly smaller,” they said.

Benchmark 10-year note yields were last up less than one basis point at 0.637%, after falling to a three-month low of 0.569% on Friday. The yield curve between two-year and 10-year notes flattened one basis point to 48 basis points.

Thirty-year bond yields edged up to 1.334%. The gap between five-year note and 30-year bonds yields , which is a popular steepening trade, widened one basis point to 104 basis points.

Reporting by Karen Brettell; Editing by Dan Grebler

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