TREASURIES-U.S. Treasury yields dive as virus variant clouds outlook

BY Reuters | TREASURY | 11/26/21 12:43 AM EST

SYDNEY, Nov 26 (Reuters) - U.S. Treasuries rallied sharply in Asia on Friday as concerns about a new COVID-19 variant drove demand for safe-haven assets and a paring of recent bets on rate hikes through next year.

Two-year yields, a guide to short-term U.S. interest rate expectations, fell 6.7 basis points (bps) to 0.5767% in Tokyo trade, the sharpest drop since March 2020.

Ten-year yields fell 8.2 bps, the sharpest drop since July, to 1.5601% and five year yields fell nearly 9 bps to 1.2565%. Bond yields fall when prices rise.

While the moves in the U.S. government bond market are still within recent ranges, they unwind some bets on higher rates put on this week after the reappointment of Jerome Powell as Federal Reserve chair.

Little is known of the variant, detected in South Africa, Botswana and Hong Kong, but scientists said it could resist vaccines and be very transmissible. It has already prompted Britain to introduce travel restrictions.

"The thinking goes that this increase in COVID could halt the Fed in their tracks as to tightening," said Andrew Brenner, head of international fixed income at NatAlliance Securities.

Long-dated government bonds also extended a rally that had begun before Thanksgiving and flattened the yield curve. Thirty-year yields fell 7 bps on Friday to 1.8969%.

A run of stronger-than-expected U.S. data and traders' belief that Powell was the more hawkish choice for Fed chair among the other options had firmed bets this week that the Fed is likely to raise rates several times next year.

Some of those bets were rolled back on Friday in Asia as Fed funds futures rallied, with the December contract in particular up 9 ticks to 99.37.

"The move today appears to be mainly due to the subdued risk sentiment arising from the revelation of a virus variant," said OCBC Bank rates analyst Frances Cheung.

"We remain of the view that Fed fund futures pricing is not overly aggressive, and some dovish triggers are needed for the market to scale back expectations." (Reporting by Tom Westbrook; Editing by Ana Nicolaci da Costa)

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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