May 1, 2018 / 7:20 PM / 25 days ago

TREASURIES -Yields advance ahead of U.S. refunding announcement

    * U.S. ISM index slips, but prices paid rise
    * U.S. Treasury to announce refunding on Wednesday
    * FOMC goes under the radar as no rate action seen

 (Adds comment, updates prices, table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 1 (Reuters) - U.S. Treasury yields rose on
Tuesday, with prices pressured ahead of a quarterly refunding
announcement that is expected to show more supply as the
government seeks to finance its massive tax cut program and
increased fiscal spending plan.
    The U.S. Treasury is scheduled to announce its findings on a
 refunding survey on Wednesday, with analysts projecting an
increase in auction sizes, or possibly new issuance at different
points on the yield curve.
    "This is the most important refunding announcement because
we expect big changes," said Gennadiy Goldberg, interest rates
strategist at TD Securities in New York. 
    "Obviously, the government has to fund themselves. The last
time we had funding needs like these was during the financial
crisis." 
    The U.S. government's fiscal deficit for 2017 was $665
billion and that is expected to rise to about $800 billion next
year, jumping to $1.1 trillion in 2019, a result of last year's
tax deal and an early 2018 spending agreement, TD Securities
said. 
    Specifically, the Treasury announced on Monday it expects to
borrow $75 billion through credit markets in the second quarter,
lower than the first quarter's borrowing of $488 billion, a
record amount for that period.
    But in the third quarter, it expects to borrow $273 billion,
which according to Action Economics, is the largest estimated
borrowing since 2011.
    TD Securities consequently expects the Treasury to increase
auction sizes to $32 billion for U.S. 3-year notes, $25 billion
for the 10-year and $17 billion for 30-year bonds.
    Expectations about increased government debt supply should
keep yields elevated, analysts said.
    With the 10-year yield hitting 3 percent, analysts wondered
whether the refunding plan has already been priced in and some
believe it has not just yet.
    "We think a worsening of the supply-demand balance will be a
key driver of a further increase in the 10-year Treasury yield
to 3.5 percent by the end of the year," said Oliver Jones,
market economist, at Capital Economics in London.
    U.S. Treasury yields briefly extended gains after details of
a U.S. report on manufacturing showed rising inflationary
pressures.
    The Institute for Supply Management posted a manufacturing
sector PMI index of 57.3 for April, lower than the consensus
forecast. But the prices paid component was 79.3, the highest
since April 2011.
    On Tuesday, the Federal Open Market Committee began its
monetary policy meeting and will announce its decision on
Wednesday. Market participants do not expect any rate action nor
a change in the Fed statement's bias as investors look to a
quarter-point tightening in June. 
    In late trading, U.S. 10-year yields were at 2.970 percent
, up from Monday's 2.936 percent.
    U.S. 30-year bond yields also rose, to 3.133 percent
, from 3.096 percent late Monday.
    On the front end of the curve, U.S. two-year yields inched
up to 2.512 percent, up from 2.488 percent on Monday.
    
    May 1 Tuesday 3:05PM New York / 1905 GMT
                               Price                  
 US T BONDS JUN8               143-6/32     -0-21/32  
 10YR TNotes JUN8              119-104/256  -0-56/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.82         1.8539    -0.015
 Six-month bills               1.9875       2.0356    -0.002
 Two-year note                 99-190/256   2.5083    0.020
 Three-year note               99-58/256    2.6487    0.034
 Five-year note                99-178/256   2.8158    0.027
 Seven-year note               99-164/256   2.9322    0.032
 10-year note                  98-32/256    2.9718    0.036
 30-year bond                  97-108/256   3.1336    0.038
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        25.00        -0.50    
 spread                                               
 U.S. 3-year dollar swap        20.75        -0.75    
 spread                                               
 U.S. 5-year dollar swap        11.00        -0.25    
 spread                                               
 U.S. 10-year dollar swap        2.75        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -11.50        -0.50    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Chizu Nomiyama, Dan Grebler and Susan Thomas)
  
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