TREASURIES-Yields fall, but rise from lows as investors weigh stimulus against loss of Fed loans

BY Reuters | ECONOMIC | 11/20/20 03:09 PM EST
    (Adds details on yield curve, analyst comment, updates prices)
    By Karen Brettell
    NEW YORK, Nov 20 (Reuters) - U.S. Treasuries pared an
overnight yield drop but ended lower on the day in choppy
trading on Friday as investors balanced the prospect of new
fiscal stimulus against the request by the U.S. government for
the Federal Reserve to return unused funds from programs meant
to backstop markets.
    Yields dropped after U.S. Treasury Secretary Steven Mnuchin
late on Thursday said the $455 billion allocated to Treasury
under the CARES Act last spring, much of it set aside to support
Federal Reserve lending to businesses, non-profits and local
governments, should be instead available for Congress to
reallocate.
    The yields gave back much of the drop as analysts said that
the move was unlikely to have systemic consequences for markets.
    ?It is good for the Fed to have these facilities in their
back pocket and that?s where they?ve effectively been over the
last couple of months, but it?s not catastrophic here and now,?
said Padhraic Garvey, regional head of research, Americas, at
ING.
    Optimism that the U.S. government may still agree to new
stimulus also helped to push the yields off their lows.
    Mnuchin on Friday said that Congress should use the money to
help small U.S. companies with grants instead and that he and
White House Chief of Staff Mark Meadows would speak with
congressional Republican leaders later Friday and would redouble
their efforts to pass further stimulus measures.
    Benchmark 10-year yields fell to an 11-day low
of 0.818%, before bouncing back to 0.829%. The yields are down
from an eight-month high of 0.975% last week, when supply and
optimism over vaccines pushed the rates higher, and have now
retraced almost all of that spike.
    The yield curve between two-year and 10-year notes
 also reached its flattest levels since Nov. 9 at
65 basis points, before steepening back to 67 basis points.
Thirty-year bonds outperformed with the spread between yields on
five-year notes and 30-year bonds compressing to 115 basis
points, the smallest gap since Sept. 29.
    The timing of Mnuchin?s request raised some concerns that
funding markets could be more vulnerable to a reduction in
liquidity heading during the crucial year-end period, when many
market participants reduce their lending.
    But Blake Gwinn, a strategist at NatWest Markets, said on
Friday that ?this shouldn't be a huge deal for funding,? adding
that ?liquidity conditions are stable in most of the markets
these were originally targeted at.?
    The cost of borrowing against Treasury collateral in the
overnight repurchase agreement (repo) market was
stable on Friday at 7 basis points. The three-month London
interbank offered rate continued to drift lower,
setting a fresh record of 20.49 basis points.
    Investors are focused on next month's Fed meeting for any
indications that the U.S. central bank could expand its
longer-dated bond purchases if the yields rise back above last
week's highs and stay elevated.
    Chicago Federal Reserve Bank President Charles Evans said on
Friday that the Fed's $120 billion monthly purchases could be
enhanced if needed, but signaled that he would be looking to
springtime to have a better notion of what the economy would
need.
November 20 Friday 3:00PM New York / 2000 GMT
                               Price
 US T BONDS DEC0               174-2/32     0-26/32
 10YR TNotes DEC0              138-128/256  0-36/256
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0675       0.0684    0.002
 Six-month bills               0.0925       0.0938    0.000
 Two-year note                 99-237/256   0.1634    -0.006
 Three-year note               100-28/256   0.2131    -0.011
 Five-year note                99-100/256   0.3747    -0.011
 Seven-year note               99-68/256    0.6083    -0.016
 10-year note                  100-112/256  0.8292    -0.026
 20-year bond                  100-188/256  1.333     -0.043
 30-year bond                  102-64/256   1.5311    -0.047

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         8.75         0.50
 spread
 U.S. 3-year dollar swap         8.00         0.50
 spread
 U.S. 5-year dollar swap         6.50         0.50
 spread
 U.S. 10-year dollar swap       -0.50        -0.50
 spread
 U.S. 30-year dollar swap      -32.00        -0.25
 spread





 (Editing by Nick Zieminski and Sonya Hepinstall)

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