February 20, 2018 / 10:32 PM / 4 months ago

TREASURIES-U.S. yields increase on supply worries

    * U.S. sells $28 bln 2-year notes to lukewarm demand
    * U.S. 5-year yield hits near 8-year peak before supply
    * Traders await Fed's Jan. 30-31 minutes on rate-hike clues
    * Wall Street losses stoke safe-haven bids for bonds

 (Adds context of second biggest weekly issuance in paragraph 2)
    By Richard Leong
    NEW YORK, Feb 20 (Reuters) - U.S. Treasury yields rose on
Tuesday with the benchmark 10-year yield hovering near a
four-year peak as investors made room for this week's deluge of
$258 billion of government debt supply.
    The amount of Treasury issuance is the second largest ever
over a three-day period, falling $1 billion short of the
all-time record high set in August 2010, according to Wrightson
ICAP chief economist Lou Crandall.
    The Treasury Department has ramped up its borrowing on the
open market in anticipation of a higher deficit from last year's
major tax overhaul and a two-year budget deal that will increase
federal spending over the next two years.
    The government is also relying more on private investors to
buy its debt as the Federal Reserve has pared its Treasury
purchases in a bid to shrink its $4.4 trillion balance sheet.
    "Supply is very, very heavy this week," said Mary Anne
Hurley, vice president of fixed income at D.A. Davidson in
Seattle. "Auction sizes will become bigger, bigger this year."
    Tuesday's wave of supply, which comprised of $151 billion in
bills and $28 billion in two-year fixed-rate notes, fetched
mixed reception from investors. 
    In light of the recent market volatility, some investors may
be drawn to these short-dated Treasuries as safe havens,
analysts said.
    A sell-off on Wall Street with the Dow falling 1 percent fed
some safe-haven demand for Treasuries.
    Still, concerns about more rate hikes from the Fed and the
possibility of further increases in federal borrowing may keep a
lid on demand at this week's auctions, they said. 
    "I suspect, however, that when the next economic downturn
eventually comes, tax receipts fall, and the deficit widens that
Treasury spreads will widen further," said Guy LeBas, chief
fixed income strategist at Janney Montgomery Scott in
Philadelphia.
    Analysts are wary of the remaining Treasury supply for this
week: $35 billion in five-year notes on Wednesday
and $29 billion in seven-year notes on Thursday.
    Medium-term Treasuries were hit hard last week following
stronger-than-forecast inflation data that stoked bets the Fed
may increase rates at a faster pace.
    The Treasury will also sell $15 billion in two-year
floating-rate notes on Thursday.
    Moreover, investors await the U.S. central bank's minutes on
its Jan. 30-31 policy meeting, which are due for release at 2
p.m. (1800 GMT) on Wednesday. They may contain clues on
policy-makers' view on future rate increases.

    The 10-year Treasury yield was 2.888 percent, up
1.1 basis points from late on Friday. It reached 2.944 percent
last week, a four-year peak.
    The two-year yield was 2.223 percent, 3.4 basis
points higher than late Friday, while the five-year yield
 was up nearly 2 basis points at 2.643 percent after
touching 2.689 percent, the highest since April 2010.
    U.S. financial markets were closed on Monday for the
Presidents Day holiday.
    
   Tuesday, Feb. 20 at 1533 EST (2033 GMT)
                               Price                  
 US T BONDS MAR8               143-30/32    -9/32     
 10YR TNotes MAR8              120-136/256  -2/32     
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.58         1.6079    0.000
 Six-month bills               1.79         1.8309    0.000
 Two-year note                 99-148/256   2.2229    0.034
 Three-year note               99-140/256   2.4082    0.022
 Five-year note                98-196/256   2.6429    0.017
 Seven-year note               98-8/256     2.814     0.010
 10-year note                  98-208/256   2.8877    0.011
 30-year bond                  97-24/256    3.1505    0.016
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       66.30        -1.85     
 30-year vs 5-year yield       50.60        0.55      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        26.50         0.00    
 spread                                               
 U.S. 3-year dollar swap        21.25         0.50    
 spread                                               
 U.S. 5-year dollar swap        10.00         0.25    
 spread                                               
 U.S. 10-year dollar swap        1.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -16.75        -1.25    
 spread                                               
 
    

    
 (Editing by Jonathan Oatis and Lisa Shumaker)
  
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