TREASURIES-Yields at four-month highs, curve steepens on stimulus hopes

BY Reuters | TREASURY | 10/23/20 09:32 AM EDT
       By Karen Brettell
    NEW YORK, Oct 23 (Reuters) - Benchmark U.S. Treasury yields
rose hit four-month highs on Friday 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 on Thursday said negotiators
were making progress in talks with the White House for another
round of COVID-19 stimulus, but Senate Republicans remained
skeptical of a possible deal costing trillions of dollars.

    Even if a deal is not reached, investors see a jump in
spending as likely if Democrat Joe Biden wins the Nov. 3
election, with a larger bill more also more likely if Democrats
win control of the U.S Senate.
    ?The market?s playing out inflation expectations here, based
on expectations that there?s more stimulus and, if Biden gets
in, that they will do even more spending than we?ve done under
the current administration,? said Lou Brien, a market strategist
at DRW Trading in Chicago.
    New fiscal spending should improve the U.S. economic outlook
and raises the prospect of higher inflation, which would send
yields higher. The Federal Reserve has also said that it will
allow inflation run hotter than previously before tightening
monetary policy.
    A glut of Treasury supply to finance the spending could also
weigh on the U.S. bond market.
    Benchmark 10-year Treasury yields rose as high
as 0.872%, the highest since June 9. It is now edging above its
200-day daily moving average, which it has held under since
December 2018.
    The yield curve between two-year and 10-year notes
 steepened to 71 basis points, the widest spread
since June 5.
    Analysts caution that ongoing economic weakness and global
demand for yield could limit any large increase in bond yields.
The Fed is also expected to shift more of its bond purchases to
longer-dated debt if it sees yields rising faster than economic
growth warrants.
    Investors have been positioning for rate increases via the
eurodollar options and swaptions markets, and any bout of profit
taking in these trades could also pull yields back lower.

      October 23 Friday 9:13AM New York / 1313 GMT
 US T BONDS DEC0               171-30/32    -0-13/32
 10YR TNotes DEC0              138-60/256   -0-24/25
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.0925       0.0938    0.003
 Six-month bills               0.1125       0.1141    0.002
 Two-year note                 99-241/256   0.1554    0.000
 Three-year note               99-194/256   0.2068    0.003
 Five-year note                99-94/256    0.3797    0.005
 Seven-year note               98-92/256    0.6172    0.009
 10-year note                  97-200/256   0.8615    0.014
 20-year bond                  94-140/256   1.4425    0.021
 30-year bond                  92-220/256   1.6805    0.023

                               Last (bps)   Net
 U.S. 2-year dollar swap         8.25         0.25
 U.S. 3-year dollar swap         7.50         0.00
 U.S. 5-year dollar swap         6.75         0.00
 U.S. 10-year dollar swap        2.25         0.00
 U.S. 30-year dollar swap      -35.25         0.00

 (Editing by Nick Zieminski)

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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