March 18, 2020 / 9:42 PM / 11 days ago

TREASURIES-Yields surge in volatile session as coronavirus crisis saps liquidity

 (Recasts and updates with market action, analyst comment)
    By Ross Kerber
    BOSTON, March 18 (Reuters) - U.S. Treasury yields swung
widely in a volatile session on Wednesday as investors scrambled
to make trades in an illiquid market, moving a closely watched
part of the yield curve to its steepest in two years.
    The benchmark 10-year yield was up 18.1 basis
points at 1.1767% after trading above 1.2% and below 1% at
several points during the day.
    The price decline in Treasuries, which move in the opposite
direction from yields and are usually considered a safe haven,
came as investors also continued to sell other assets like
stocks. 
    The yield curve spread between the two- and 10-year Treasury
notes was at 63 basis points, about 7 basis points wider than
Tuesday's close and at its biggest gap since February 2018.
    Market participants said the wide range of yields during the
day reflected reduced trading volumes. That made it harder for
investors to price in an evolving government response to the
coronavirus epidemic as they updated economic models far from
their offices.
    "You have a lot of people working from home, you’re not
being as efficient and you have a lot less liquidity in the
market," said Mary Ann Hurley, vice president for fixed income
trading at D.A. Davidson in Seattle.
    "These are far from normal circumstances,” she said.
    FHN Financial interest rate strategist Jim Vogel said lower
trading volumes this month have also reduced the usefulness of
bond market signals for policymakers and investors.
    "At every given two-hour stretch there’s not enough flow to
be able to say precisely what Treasury yields are indicating
other than the last five or six trades. That's a form of 
illiquidity," he said.
    Currently, "it's hard to say what the Treasury market is
really concluding, other than reacting to headlines,” Vogel
said.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was up 7.3 basis
points at 0.5337% in afternoon trading. 
    A late-afternoon rise in yields occurred even as U.S. stocks
deepened their selloff. The U.S. Treasury and
Internal Revenue Service said they would allow U.S. individuals
and corporations to defer making certain tax payments until July
15.
    Cases of the respiratory illness have been reported in all
50 U.S. states and millions of Americans are staying home from
work. The Trump administration on Wednesday asked Congress to
approve $500 billion in cash payments to taxpayers and $50
billion in secured loans to U.S. airlines to address the
financial impact of the coronavirus.    
    The Fed on Tuesday said it would reopen the so-called
Commercial Paper Funding Facility to underwrite the short-term
loans companies often use to fund operations, a key financial
market backstop first set up 2007 to 2009.
    It also extended its reach as the economy's lender of last
resort to the two dozen Wall Street primary dealers, letting
them pledge municipal bonds, corporate debt and equity
securities as collateral for 90-day Fed loans to keep credit
flowing.
    The New York Fed said it will make up to $1 trillion a day
available for loans in the repurchase agreement (repo) market
for the remainder of this week.
    On Wednesday morning, the New York Fed said it accepted
$85.8 billion in overnight repo bids from primary dealers.
 In another operation later in the day, it accepted
a further $13.2 billion in overnight repo bids.
      March 18 Wednesday 3:33PM New York / 1933 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.02         0.0203    -0.188
 Six-month bills               0.075        0.0761    -0.163
 Two-year note                 101-37/256   0.5337    0.073
 Three-year note               99-134/256   0.6613    0.119
 Five-year note                101-154/256  0.7943    0.144
 Seven-year note               100-66/256   1.0864    0.192
 10-year note                  103-4/256    1.1767    0.181
 30-year bond                  105-104/256  1.7665    0.186
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         4.75        -2.00    
 spread                                               
 U.S. 3-year dollar swap        -2.50        -5.50    
 spread                                               
 U.S. 5-year dollar swap         1.75        -4.75    
 spread                                               
 U.S. 10-year dollar swap      -13.25        -7.00    
 spread                                               
 U.S. 30-year dollar swap      -73.25        -9.00    
 spread                                               
 
 (Reporting by Ross Kerber
Editing by Alden Bentley and Cynthia Osterman)
  
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