TREASURIES-Yields drop on safety demand as stocks fall, Ukraine risks weigh

BY Reuters | TREASURY | 01/21/22 09:49 AM EST
       By Karen Brettell
    NEW YORK, Jan 21 (Reuters) - U.S. Treasury yields fell on
Friday as concerns about potential conflict in Ukraine dented
risk appetite and stock market declines increased demand for the
safe-haven debt.
    Yields have jumped this month as investors adjust to the
likelihood that the Federal Reserve will tighten monetary policy
more aggressively to stave off unabated inflation.
    But that increase has also helped to spook stock markets,
and analysts say that the rapid march higher in yields was due
for a pause.
    "We got to where we got to very fast so you're always liable
to have a little bit of a pause for thought, and there is
evidence of some players coming in and looking at this," said
Padhraic Garvey, regional head of research, Americas at ING.
    Demand for U.S. government debt has also increased on
concerns about potential conflict in Ukraine.
    "Clearly if the Ukraine story was to go wrong there would be
quite a significant bid for Treasuries, and this notion of the
10-year getting to 2% would be put on hold until we really
understand what the implications of such a move would be,"
Garvey said.
    U.S. Secretary of State Antony Blinken said after talks with
Russia's foreign minister on Friday that Moscow would face a
"swift, severe and a united response" if it invaded Ukraine.

    Benchmark 10-year note yields dropped to 1.763%.
They are down from 1.902% on Wednesday, which was the highest
since Jan. 2020.
    Next week's Fed meeting is the major focus for the market.
While the U.S. central bank is not expected to hike rates, it
may indicate that a rate increase is likely in March.
    Investors are also looking for any clues on whether the U.S.
central bank will speed up the end of its bond purchase program,
when it is likely to begin reducing the size of its massive
balance sheet and whether it could raise rates by 50 basis
points in March rather than 25.
    Fed funds futures traders are fully pricing in a 25 basis
point hike in March, and only a 5% chance of a 50 point hike
that month, in addition to three more rate increases by
year-end.
    Garvey said demand in the Fed's reverse repurchase agreement
facility shows that it may be easier for the Fed to reduce its
balance sheet than take more aggressive action on rates.
    "There's clearly room for the Fed to take bigger action
there, rather than going down the route for example of having a
50 basis point hike," Garvey said.
    Investors lent the Fed $1.68 trillion on Thursday as demand
for safe, short-dated assets continued to outstrip supply. The
Fed's balance sheet stood at $8.79 trillion as of Jan. 12. It is
up from $3.76 trillion in mid-2019.

    January 21 Friday 9:35AM New York / 1435 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.1725       0.175     -0.005
 Six-month bills               0.3475       0.3529    -0.008
 Two-year note                 99-133/256   1.0015    -0.049
 Three-year note               99-142/256   1.278     -0.064
 Five-year note                98-150/256   1.5488    -0.069
 Seven-year note               97-214/256   1.7072    -0.073
 10-year note                  96-132/256   1.7634    -0.071
 20-year bond                  97-156/256   2.1488    -0.055
 30-year bond                  95-88/256    2.0855    -0.056

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        18.50         0.75
 spread
 U.S. 3-year dollar swap        16.00         1.25
 spread
 U.S. 5-year dollar swap         8.50         0.50
 spread
 U.S. 10-year dollar swap        6.00         1.00
 spread
 U.S. 30-year dollar swap      -18.25         0.25
 spread


 (Reporting by Karen Brettell)

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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