TREASURIES-US Treasury yields dive as virus variant dents growth outlook

BY Reuters | TREASURY | 11/26/21 05:30 AM EST

(Updates price action, adds move in TIPs, chart)

By Tom Westbrook and Dhara Ranasinghe

SYDNEY/LONDON Nov 26 (Reuters) - Concerns about a new coronavirus variant on Friday drove the sharpest rally in short-dated U.S. Treasuries since the pandemic took hold, as investors scurried for safe-haven assets and pared some of their bets on rate hikes through next year.

Two-year yields, a guide to short-term U.S. interest rate expectations, slid 12 basis points (bps) to as low as 0.51%, the sharpest daily drop since COVID first sent shockwaves through world markets in March 2020.

Ten-year yields were also down 12 bps, the biggest drop since February this year, to around 1.53% and five year yields tumbled 14 bps to around 1.19%. Bond yields fall when prices rise.

As trading in U.S. bonds picked up a day after the U.S. Thanksgiving Day holiday, the fall in yields reflected similar moves in European bond markets.

U.S. stock futures were down 1%-2% in European trade and oil prices sank more than 5% , driving demand for safe-haven assets.

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

The news saw some unwinding of bets on higher rates put on after President Joe Biden said on Monday he would nominate Fed Chairman Jerome Powell to a second term.

"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.

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 on several interest rate rises next year.

Money markets price 14 basis points of rate hikes for May, down from the 18 bps priced earlier this week. Bets on a June 25 basis-point hike have also been pared very slightly.

"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."

Long-dated government bonds also extended a rally that had begun before Thanksgiving and flattened the yield curve. Thirty-year yields fell 10 bps on Friday to 1.85%.

Real or inflation-adjusted yields also fell sharply as the latest COVID-headlines and the sharp drop in oil prices prompted investors to scale back expectations for inflation.

The yield on the 10-year Treasury Inflation-Protected Securities (TIPS) was last down 12 bps at -1.107% and set for its biggest one-day drop since February.

(Reporting by Tom Westbrook in Sydney and Dhara Ranasinghe in London; Editing by Ana Nicolaci da Costa and Barbara Lewis)

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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