TREASURIES-Two-year yields rise to pandemic high, spreads fall on Powell nomination

BY Reuters | TREASURY | 11/22/21 01:36 PM EST
    (Updates with 5 year Treasury auction, tweaks headline)
    By David Randall
    NEW YORK, Nov 22 (Reuters) - U.S. Treasury yields rose on
Monday after President Joe Biden announced he would nominate Fed
Chairman Jerome Powell to a second term while elevating Fed
Governor Lael Brainard to vice chair.
    Powell, who was widely expected to be tapped for a second
term, will helm the central bank as it begins to pull back its
emergency-level support of the economy and tame inflation, which
recently hit its highest levels since 1990.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, rose slightly
above 0.58%, its highest level since early March 2020, following
a weak auction of $58 billion in notes, said Lou Brien, an
analyst at DRW Trading.
    The Treasury also auctioned $59 billion in five-year notes
in a sale that Brien characterized as "less than good," with
primary dealers taking the largest percentage of the sale since
February.
    Rising short-term yields suggests that the market is
anticipating a more aggressive tapering move by the Fed in 2022,
said Ian Lyngen, head of U.S. Rates Strategy at BMO Capital
Markets. Powell's nomination "certainly puts an earlier liftoff
on the table," he said.
    Futures on the federal funds rate, which track
short-term interest rate expectations, on Monday priced in a
100% chance of a quarter-point tightening by the Federal Reserve
by June next year after President Joe Biden re-nominated Jerome
Powell as Fed chairman. They was already at more than 90% before
Biden's announcement.
    Powell's nomination "provides a little bit more legitimacy
to market pricing in terms of Fed tightening next year," said
Mazen Issa, senior currency strategist at TD Securities.
    The yield on 10-year Treasury notes was up 7.7
basis points to 1.613%. The yield on the 30-year Treasury bond
 was up 5.8 basis points to 1.965%.
    Spreads between 5 and 30-year Treasuries fell to their
lowest levels since March 2020, while the spread between 5 and
10-year Treasuries fell to their lowest since July 2020.

      November 22 Monday 1:17PM New York / 1817 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0475       0.0482    -0.003
 Six-month bills               0.0675       0.0685    0.005
 Two-year note                 99-155/256   0.5801    0.075
 Three-year note               99-118/256   0.934     0.088
 Five-year note                99-38/256    1.3036    0.101
 Seven-year note               98-244/256   1.5346    0.097
 10-year note                  97-208/256   1.6132    0.077
 20-year bond                  99-204/256   2.0124    0.072
 30-year bond                  97-244/256   1.9657    0.059

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        26.75         0.75
 spread
 U.S. 3-year dollar swap        21.75         1.50
 spread
 U.S. 5-year dollar swap        10.75         0.25
 spread
 U.S. 10-year dollar swap        5.50         1.50
 spread
 U.S. 30-year dollar swap      -17.75         2.00
 spread


 (Reporting by David Randall. Additional reporting by Gertrude
Chavez-Dreyfuss.
Editing by Angus MacSwan and 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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