TREASURIES-Treasury prices rebound sharply after BoE decision

BY Reuters | ECONOMIC | 09/28/22 05:06 PM EDT
    (Adds comment, end of day prices)
    By Herbert Lash
       NEW YORK, Sept 28 (Reuters) -
    U.S. Treasury prices rebounded sharply on Wednesday after the Bank of England bought
long-dated UK bonds to restore financial stability in markets rocked globally by the new British
government's fiscal policy plans.
    Yields on Treasuries and British gilts plummeted and their prices soared on BoE's
intervention to quell a market firestorm sparked by Britain's plans announced last week to slash
taxes and ramp up borrowing. Bond yields move inversely to their price.
    The yield on 10-year Treasuries fell more than 26 basis points to just under
3.70%, on track to the biggest single-day drop since March 2009. In early trade before the BoE's
intervention, the benchmark briefly hit a 12-year high of 4.004%.
        "The last couple of days Treasuries are a little bit unhinged given how precipitously
yields had risen," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. "But
now that we have a backstop from the BoE, you have a bit of a stabilization and 10s are trading
much more in line with fundamentals."

        Thirty-year gilt yields ended the day more than 100 basis points lower at
3.934% - the largest one-day fall since at least 1992, when Refinitiv records for the bond
began.

    Britain's new economic agenda sent the pound to an all-time low against the dollar, just
above $1.03, and deepened a steep sell-off that created a bear market in bonds for the first
time in decades.
    The BoE is trying to cap a vicious sell-off and markets need to not interpret the UK central
bank's actions as quantitative easing, Rajappa said.
        "That's not the objective. The objective is to put a lid, if you will, on long bond
yields in the UK," she said.

    The BoE's move put a circuit breaker on the upward spiral in yields and stemmed the dollar's
advance, the main cause of fear and instability in markets, said Jimmy Chang, chief investment
officer at Rockefeller Global Family Office.
    The decision also revived "a little bit of the hope that maybe the Fed won't be as
aggressive as it has sounded," Chang said.
    Recent comments from Fed officials suggested that hopes for an imminent easing of monetary
policy is misguided.
        Chicago Fed President Charles Evans said in London it would be good to get the policy
rate to a range of 4.5%-4.75% by year-end or March, while Atlanta Fed President Raphael Bostic
backed another 75-basis-point interest rate hike in November.

        The BoE needed to come in and stabilize the market for now, Chang said. "But then they
also say that they're going to be buying gilts into mid-October. So what happens after that?"
    The implication is the British central bank will need to raise interest rates aggressively,
Chang said.
    "They've really been boxed in. They're dealing with stagflation and a market just pushing
back against what (new Prime Minister Liz) Truss has proposed with very aggressive tax cuts," he
said.
    The 10-year Treasury last yielded 3.709%, down 25.4 basis points.
    The two-year Treasury yield, which typically moves in step with interest rate
expectations, fell 21.4 basis points to 4.094%.
    The closely watched part of the U.S. Treasury yield curve between two- and 10-year Treasury
notes, a gap seen as a harbinger of a looming recession, initially flattened before
trading little changed at -38.9 basis points.
    The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS)
 was last at 2.427%.
    The 10-year TIPS breakeven rate was last at 2.333%, indicating the market sees
inflation averaging about 2.3% a year for the next decade. In late August the breakeven rate was
at 2.64%.
    The 10-year TIPS yield earlier hit a 12-1/2-year high at 1.692%.
    The U.S. dollar five-years forward inflation-linked swap, seen by some as a
better gauge of inflation expectations due to possible distortions caused by the Fed's
quantitative easing, was last at 2.356%.
    The Treasury sold $36 billion in seven-year notes at a high yield of 3.898% in a well-bid
auction.
     Sept. 28 Wednesday 3:48PM New York / 1948 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             3.285        3.3585    0.030
 Six-month bills                               3.785        3.9124    -0.037
 Two-year note                                 100-76/256   4.0939    -0.214
 Three-year note                               98-68/256    4.1278    -0.272
 Five-year note                                100-228/256  3.9271    -0.287
 Seven-year note                               95-156/256   3.8536    -0.287
 10-year note                                  92-32/256    3.7092    -0.254
 20-year bond                                  91-192/256   3.9793    -0.160
 30-year bond                                  87-204/256   3.6763    -0.152

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 31.50         3.50
 U.S. 3-year dollar swap spread                  8.25         6.25
 U.S. 5-year dollar swap spread                  4.25         4.00
 U.S. 10-year dollar swap spread                 4.00         5.50
 U.S. 30-year dollar swap spread               -42.00         3.00

 (Reporting by Herbert Lash, additional reporting by Tom Westbrook in Sydney; Editing by Ana
Nicolaci da Costa, Jonathan Oatis and Richard Chang)

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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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