TREASURIES-Yields tumble on COVID fears, illiquid market seen adding to move

BY Reuters | TREASURY | 11/19/21 09:58 AM EST
    (Adds quotes, details, updates prices)
    By Karen Brettell
    NEW YORK, Nov 19 (Reuters) - U.S. Treasury yields tumbled on
Friday as concerns about new lockdowns related to the spread of
COVID-19 in Europe increased demand for the safe haven bonds,
though the move was likely exaggerated by impaired liquidity
that has plagued the market for the past few weeks.
    Germany's health minister said a lockdown, including
vaccinated people, could not be ruled out. Austria said it will
reimpose a full lockdown next week and require its entire
population to be vaccinated as of February.
    Europe has again become the epicenter of the pandemic in
recent weeks. Markets, which had been relatively calm despite
the outbreak so far, moved sharply on the news, sending
Germany's entire yield curve back into negative territory for
the first time since August.
    The European response has raised some concerns that new
lockdowns could also happen in the United States if there is a
dramatic rise in cases, which would hurt the economy.
    "Even though Europe has been more aggressive than the U.S.
in terms of heavy-handed government responses to COVID, there is
always chatter about how we could see the same sort of stuff
happening over here if cases were to increase significantly,"
said Tom Simons, a money market economist at Jefferies in New
York, though he added that "I don't think those fears are
necessarily justified."
    The size of the reaction, which sent 10-year yields down as
much as nine basis points on the day, also indicates impaired
market liquidity that analysts say is in part because hedge
funds burned by volatile moves in October and November have
pulled back from the market.
    "The hedge fund community is not in there in the same way
that they normally are and that could be creating a little more
of an illiquid market and a little bit more rate movement than
normally we would otherwise see," said Simons.
    Benchmark 10-year notes last yielded 1.536%,
down five basis points on the day, after dropping as low as
1.515%. the lowest since Nov. 10.
    Shorter-dated Treasury yields surged in October, while
30-year bond yields plunged as a rapid rise in inflation led
investors to adapt to the possibility that the U.S. Federal
Reserve may need to raise rates as soon as mid-2022 to stem
price pressures.
    The move created rapid flattening in the curve between
five-year notes and 30-year bonds as many
investors who had bet on steepening were stopped out of their
trades.
   That curve was last at 76 basis points, after
reaching 62 basis points on Nov. 12, which was the flattest
since March 2020. It is down from 115 basis points on Oct. 6.
    Liquidity is also expected to worsen next week before the
market will close on Thursday for Thanksgiving.
    The Treasury next week will sell $176 billion in new
coupon-bearing supply, including $58 billion in two-year notes
and $59 billion in five-year notes on Monday, as well as $59
billion in seven-year notes on Tuesday.

    November 19 Friday 9:35 AM New York / 1435 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.05         0.0507    0.000
 Six-month bills               0.0625       0.0634    0.000
 Two-year note                 99-216/256   0.456     -0.046
 Three-year note               99-216/256   0.8031    -0.042
 Five-year note                99-204/256   1.1674    -0.056
 Seven-year note               99-184/256   1.4177    -0.055
 10-year note                  98-132/256   1.536     -0.051
 20-year bond                  100-148/256  1.9648    -0.037
 30-year bond                  98-164/256   1.935     -0.038

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        25.00         0.75
 spread
 U.S. 3-year dollar swap        19.00        -0.25
 spread
 U.S. 5-year dollar swap        10.00         0.25
 spread
 U.S. 10-year dollar swap        4.00         0.25
 spread
 U.S. 30-year dollar swap      -20.25        -0.25
 spread



 (Additional reporting by Yoruk Bahceli in London)

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.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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