TREASURIES-Yields tick up after Trump about-face on stimulus

BY Reuters | TREASURY | 10/09/20 03:14 PM EDT

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By Kate Duguid

NEW YORK, Oct 9 (Reuters) - Yields on Treasury bonds rose modestly on Friday afternoon as market appetite for risk improved after U.S. President Donald Trump, in a reversal from earlier this week, said he would like to see a bigger coronavirus stimulus package than either Democrats or Republicans are offering.

Trump made the remarks Friday after reports suggested the White House was preparing to raise its offer for an aid deal to $1.8 trillion from $1.6 trillion, still shy of the $2.2 trillion that Democrats are seeking.

Trump's announcement on Tuesday that he was withdrawing the White House from negotiations until after the election hit U.S. stocks and drove prices on safe-haven assets like Treasuries higher.

But risk markets did not stay low for long. After a contentious debate between presidential candidates Trump and Democratic nominee Joe Biden last week, investors have raised their bets on a Biden victory. Though risk markets have not traditionally rallied on the prospects of a left-leaning candidate winning the office, a clear-cut Biden victory is seen as all but assuring further fiscal stimulus and as lowering the chances of post-election instability.

Though yields were modestly higher on Friday, gains will be limited for the time being, argued analysts.

"The potential for a more significant breakout will be limited by the proximity to the election," wrote Ian Lyngen and Jon Hill, analysts at BMO Capital Markets.

"The steady equity performance emphasizes the importance of election clarity over outcome. This implies there is further upside to be realized in the event of a decisive victory in either direction."

Hill also noted that a rise in the 10-year Treasury yield is currently being limited by technical factors. Though the yield has risen this week on an intra-day basis to its highest since June 10, above the previous peak hit on Aug. 28, it has closed below the August level on days it was breached intra-day.

"It's also telling that the biggest support level in 10-year Treasuries wasn't breached on a closing basis. August 28th yield peak was 78.7 basis points and although we had three days with a close very close to that, none were actually able to breach that," said Hill.

The benchmark 10-year yield was last up 1 basis point to 0.777%. The two-year yield was up 0.8 basis point at 0.155%. The yield curve, measured as the spread between two- and 10-year yields, was narrower by 1.3 basis points to 61.9 basis points. (Reporting by Kate Duguid Editing byChizu Nomiyama and Cynthia Osterman)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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