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TREASURIES-Yields dip then extend lower after hours on Mnuchin clawback from Fed

 (Adds Treasury, Fed news and late market prices)
    By Karen Brettell
    NEW YORK, Nov 19 (Reuters) - U.S. Treasury yields fell on
Thursday as the prospect of a weak fourth economic quarter
overcame optimism that vaccines against COVID-19 are close to
being rolled out and could return the economy to normal.
    "The focus has shifted away from exuberance on vaccines to
the rising infection rate and the start of the deterioration of
the fundamentals we're seeing in the data heading into Q4," said
Subadra Rajappa, head of U.S. interest rates strategy at Societe
Generale in New York.
    After Wall Street closed, Treasuries got a risk-off boost,
with yields falling further and U.S. stock futures
dropping on surprise news that Treasury Secretary Steven Mnuchin
told the Federal Reserve to return money earmarked for pandemic
lending to businesses, nonprofits and local governments. The
government will end on Dec. 31 some crisis programs that the
central bank views as vital to keeping the economy stable.

    The number of Americans filing new claims for jobless
benefits unexpectedly rose last week as new business closures to
control spiraling COVID-19 infections unleashed a fresh wave of
layoffs and further slowed the labor market recovery.

    Benchmark 10-year yields fell 3 basis points to
0.855% during regular trade, then slipped to 0.82% in the wake
of Mnuchin's announcement. 
    The yields are down from an eight-month high of 0.975% last
week, when supply and optimism over vaccines pushed the rates
higher.
    The yields came off session lows of 0.842% in afternoon
trading after CNBC reported that Democratic and Republican
senators had agreed to resume stimulus talks.
    The yield curve between two-year and 10-year notes
 flattened 1 basis point to 68 basis points,
extending to 66 basis points later. Thirty-year bonds
outperformed, with the spread between the bonds and 10-year
notes tightening as far as 71 basis points, the
smallest gap since Sept. 3.
    Yields on one-year Treasury bills fell to 0.101%,
the lowest since April. 
    Last week's spike in yields has increased speculation that
the Federal Reserve may increase its purchases of long-dated
debt by shifting more of its bond purchases further out the
curve, or by increasing the overall amount of its quantitative
easing, in order to keep monetary conditions loose.
    But many analysts and investors see such a move as likely
only if 10-year yields rise above the 1% level and remain
elevated. They have now retraced almost all of last week's spike
and what the late news from the Treasury Department means for
its overall market support operations is an open question.
    At current levels, "I don't know that they would start to
step in just yet," said Paula Solanes, senior portfolio manager
at SVB Asset Management. At the Fed's December meeting the U.S.
central bank may "telegraph the message of what they plan to
do," she said.
    Dallas Federal Reserve Bank President Robert Kaplan on
Thursday said that "if we needed to, if this got bad enough, we
could extend maturities, but I wouldn't increase the size."

    The Treasury Department saw strong demand for a $12 billion
sale of 10-year Treasury Inflation-Protected Securities (TIPS)
on Thursday.
    The notes sold 1 basis point below where they traded before
the auction with high yield of -0.867%. Dealers took less than
average at 15.2% of the sale, indicating strong demand by
investors.
    Break-even rates on the 10-year TIPS are
pricing in average annual inflation of 1.681% over the coming
decade, with fiscal stimulus expected next year likely to boost
price pressures, but still leave them below Fed targets.
    The Fed has said it will allow inflation to run hotter than
its previous 2% target before tightening monetary policy.
    
    November 19 Thursday 3:00PM New York / 2000 GMT
                               Price                  
 US T BONDS DEC0               173-8/32     0-23/32   
 10YR TNotes DEC0              138-96/256   0-48/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.065        0.0659    -0.020
 Six-month bills               0.0925       0.0938    0.003
 Two-year note                 99-234/256   0.1693    -0.006
 Three-year note               100-20/256   0.2237    -0.005
 Five-year note                99-86/256    0.3857    -0.012
 Seven-year note               99-40/256    0.6243    -0.019
 10-year note                  100-48/256   0.8554    -0.027
 20-year bond                  100          1.375     -0.046
 30-year bond                  101-32/256   1.5778    -0.042
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         8.25         0.25    
 spread                                               
 U.S. 3-year dollar swap         7.50         0.25    
 spread                                               
 U.S. 5-year dollar swap         6.00         0.00    
 spread                                               
 U.S. 10-year dollar swap        0.00         0.50    
 spread                                               
 U.S. 30-year dollar swap      -31.75         0.50    
 spread (Reporting by Karen Brettell; Additional reporting by Alden
Bentley; Editing by Jonathan Oatis and Matthew Lewis)
  
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