TREASURIES-U.S. yields dip as investors assess effect of China reopen

BY Reuters | ECONOMIC | 12/28/22 10:27 AM EST

By Chuck Mikolajczak

NEW YORK, Dec 28 (Reuters) - The yield on the benchmark U.S. 10-year Treasury dipped on Wednesday, after recording its biggest one-day jump in just over two months in the prior session, as investors gauged the impact of China's reopening policy on the path of interest rate hikes by the U.S. Federal Reserve.

While China has quickly reversed course on its previous "zero-COVID" policy this month, a move likely to benefit the global economy, the change has come with a surge in cases that could hamper the economy in the short-term.

The yield on 10-year Treasury notes was down 1.5 basis points to 3.843%. On Tuesday, the 10-year jumped 11.1 basis points, its biggest one-day rise since Oct. 19 to hit a five-week high of 3.862%.

"If the 10-year gets to 4% the floodgates are going to open, there will be a lot of buying at that level," said Jay Sommariva, managing partner and chief of asset management at Fort Pitt Capital Group in Pittsburgh.

"That is really not that far considering you went from a 3.41% to a 3.862%, that is a major move, so 15 basis points on top of that the floodgates will probably open at that point and you will see an enormous amount of buying there."

After hitting a near three-month low on Dec. 7 as hopes grew the Fed would signal an end to its rate hike cycle was on the horizon, the 10-year yield has steadily climbed. It saw its biggest weekly rise in 8-1/2 months last week on the heels of policy announcements from the U.S. central bank, Bank of England and European Central Bank (ECB).

The yield on the 30-year Treasury bond was

down 0.2 basis points




Forecasts by the central bank see the fed funds rates climbing above 5% next year, while Fed Chair Jay Powell and other Fed officials have emphasized there may be a need to keep rates at a higher level for longer to completely stamp out inflation.

Analysts have cautioned, however, it is difficult to put too much weight on market direction this week given the limited trading activity around the holidays.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 49.3 basis points.

More supply will come to the market on Wednesday when Treasury will auction $43 billion in 5-year notes.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 3.3 basis points at 4.335%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.376%, after closing at 2.368% on Tuuesday.

The 10-year TIPS breakeven rate was last at 2.285%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama)

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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