TREASURIES-Yields hit four-month highs on fiscal stimulus hopes

BY Reuters | TREASURY | 10/22/20 03:14 PM EDT
    (Adds details on stimulus talks, updates yields)
    By Karen Brettell
    NEW YORK, Oct 22 (Reuters) - Benchmark U.S. Treasury yields
rose to four-month highs on Thursday and the yield curve
steepened on hopes that U.S. lawmakers are close to striking a
deal on new fiscal stimulus.
    U.S. House Speaker Nancy Pelosi said on Thursday negotiators
were making progress in talks with the Trump administration for
another round of financial aid amid the COVID-19 pandemic and
that legislation could be hammered out "pretty soon."

    Hopes of new fiscal spending has dominated trading this
week, and sent yields higher as it appears that a near-term deal
is more likely.
    "It's headline driven at this point," said Justin Lederer,
an interest rate strategist at Cantor Fitzgerald in New York.
    Many investors are betting that new stimulus is likely after
the Nov. 3 presidential election if lawmakers do not agree to it
now, with Democrats likely to offer a larger package if they win
a majority in the Senate.
    Benchmark 10-year Treasury yields rose as high
as 0.853%, the highest since June 9. The yield curve between
two-year and 10-year notes steepened to 70 basis
points, the widest spread since June 8.
    New fiscal spending should improve the U.S. economic outlook
and raises the prospect of higher inflation, which would send
yields higher. A glut of Treasury supply to finance the spending
could also weigh on the U.S. bond market.
    Analysts caution that ongoing economic weakness and global
demand for yield could limit any large increase in bond yields.
The Federal Reserve is also expected to shift more of its bond
purchases to longer-dated debt if it sees yields rising faster
than economic growth warrants.
    Yields rose slightly on Thursday after U.S. data showed new
claims for jobless benefits declined more than expected last
week, though they remained extremely high.
    The Treasury Department saw strong demand for a $17 billion
in five-year Treasury Inflation-Protected Securities (TIPS) on
    It came after a solid auction of $22 billion in 20-year
bonds on Wednesday.
      October 22 Thursday 3:00PM New York / 1900 GMT
 US T BONDS DEC0               172-12/32    -0-23/32
 10YR TNotes DEC0              138-88/256   -0-60/25
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.09         0.0913    -0.005
 Six-month bills               0.11         0.1116    -0.005
 Two-year note                 99-242/256   0.1533    0.004
 Three-year note               99-196/256   0.204     0.008
 Five-year note                99-102/256   0.3731    0.022
 Seven-year note               98-112/256   0.6053    0.025
 10-year note                  97-236/256   0.8461    0.030
 20-year bond                  94-240/256   1.419     0.032
 30-year bond                  93-100/256   1.6568    0.028

                               Last (bps)   Net
 U.S. 2-year dollar swap         8.25         0.00
 U.S. 3-year dollar swap         7.50         0.00
 U.S. 5-year dollar swap         6.75        -0.75
 U.S. 10-year dollar swap        2.50        -0.25
 U.S. 30-year dollar swap      -35.25        -0.25

 (Editing by Bernadette Baum and Richard Chang)

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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