TREASURIES-Long-dated yields tumble on COVID fears; two-year yields jump on hawkish Clarida

BY Reuters | TREASURY | 11/19/21 03:33 PM EST
    (Adds Fed comments, rate hike pricing, updates prices)
    By Karen Brettell
    NEW YORK, Nov 19 (Reuters) - Long-dated U.S. Treasury yields
tumbled on Friday as concerns about new lockdowns related to the
spread of COVID-19 in Europe increased demand for safe-haven
bonds, though the move was likely exaggerated by low liquidity.
    Two-year yields jumped, meanwhile, after Federal Reserve
Vice Chair Richard Clarida took a hawkish tone in a speech and
acknowledged that there is an upside risk to inflation.
    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.
    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, 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 1.538%,
down five basis points on the day, after dropping as low as
1.515%. the lowest since Nov. 10.
    Many investors were caught offside in October as a rapid
rise in inflation led traders to reprice for the possibility
that the Fed may need to raise rates as soon as mid-2022 to stem
price pressures.
    Two-year yields also jumped on Friday after Clarida said
that it "may very well be appropriate" to discuss speeding up
the Fed's asset purchase wind-down when it next meets in
December.
    Traders are now pricing in a 67% chance of a rate hike in
June 2022, compared with a 54% chance earlier Friday, according
to the CME Group's FedWatch tool.
    The two-year yields were last at 0.505%, after
falling to 0.446% earlier in the day.
    Fed Governor Christopher Waller also said on Friday that the
U.S. central bank should stand ready to increase the pace of its
reduction in bond purchases and raise interest rates from their
near zero level sooner than it currently expects due to
persistently high inflation and the strength of job gains.

    Liquidity is expected to decline further next week before
the market closes on Thursday for Thanksgiving, which could
result in even choppier market moves.
    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 3:00PM New York / 2000 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                 99-192/256   0.5047    0.003
 Three-year note               99-182/256   0.8484    0.003
 Five-year note                99-160/256   1.2034    -0.020
 Seven-year note               99-148/256   1.4391    -0.034
 10-year note                  98-128/256   1.5377    -0.049
 20-year bond                  100-248/256  1.9412    -0.061
 30-year bond                  99-68/256    1.9073    -0.066

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        26.00         1.75
 spread
 U.S. 3-year dollar swap        20.25         1.00
 spread
 U.S. 5-year dollar swap        10.50         0.75
 spread
 U.S. 10-year dollar swap        4.00         0.25
 spread
 U.S. 30-year dollar swap      -19.75         0.25
 spread



 (Additional reporting by Yoruk Bahceli in London; Editing by
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.

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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