TREASURIES-Longer-dated yields rise ahead of BOJ decision, corporate supply weighs

BY Reuters | ECONOMIC | 01/17/23 09:58 AM EST
       By Karen Brettell
       NEW YORK, Jan 17 (Reuters) - Longer-dated U.S. Treasury
yields rose on Tuesday in choppy trading as investors awaited
the outcome of the Bank of Japan's two-day meeting on Wednesday
and prepared for the likelihood of an increase in corporate debt
    Japanese 10-year government bond yields topped the BOJ's
policy ceiling for a third straight session on Tuesday amid
swirling speculation that policymakers could tweak stimulus
    If the Japanese central bank unwinds its yield curve control
it is likely that Japanese yields will rise further, which would
make the debt more attractive relative to U.S. Treasuries after
accounting for foreign exchange hedges. In turn, Japanese
investors may sell, or be less likely to purchase, U.S.
government debt.
    "The Bank of Japan is definitely a wildcard because there
does seem to be some speculation that there could be a
significant announcement coming out of the meeting," said Thomas
Simons, a money market economist at Jefferies in New York.
    Traders are also expecting companies to issue more debt on
Tuesday, as is common after financial companies release
earnings, said Simons. Heavy corporate supply can weigh on
Treasuries as banks hedge the new sales.
    Goldman Sachs Group Inc (GS) and Morgan Stanley (MS)
both reported earnings on Tuesday.
    Benchmark 10-year note yields rose two basis
points to 3.54% and two-year Treasury yields dipped
three basis points to 4.21%.
    The yield curve between two-year and 10-year notes
steepened, but remained deeply inverted at minus 69 basis
    Long-dated yields pared their gains after data on Tuesday
showed that the New York Federal Reserve's business conditions
index fell sharply in January. This week's main U.S. economic
focus will be retail sales and producer prices for December that
will be released on Wednesday.
    The U.S. debt ceiling is also a potential market issue, with
the government expected to reach its maximum borrowing capacity
this week, after which it will need to rely on extraordinary
    The Treasury is expected to be able to fund itself until
around July or August, though there is a lot of uncertainty of
when it will ultimately run out of money if Congress fails to
increase the debt limit.
    "I don't think we're going to see a specific date pop out as
being particularly dangerous until we get through tax season in
mid-April, by then I think it will really crystallize because
we'll have a much better sense of what the biggest inflows and
outflows from Treasury's cash balance are going to be for the
year," said Simons.
    The cost of insuring U.S. debt against default reached 32
basis points on Tuesday, which was the widest spread since 2013.

    Six-month bills are also yielding more than one-year debt,
at 4.81% and 4,71%, respectively. This may indicate some
aversion around bills maturing when the debt ceiling is expected
to come to a head, though it also reflects expectations that the
Federal Reserve will cut rates in the second half of this year.

    Fed funds futures traders are pricing for the benchmark rate
to peak at 4.93% in June, before declining to 4.47% in December.
The U.S. central bank is expected to raise rates by 25 basis
points when it concludes its two-day meeting on Feb. 1.

      January 17 Tuesday 9:38AM New York / 1438 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.53         4.6426    0.023
 Six-month bills               4.635        4.8083    0.010
 Two-year note                 100-17/256   4.2131    -0.028
 Three-year note               99-248/256   3.886     -0.014
 Five-year note                101-42/256   3.6157    0.002
 Seven-year note               101-206/256  3.5792    0.015
 10-year note                  104-220/256  3.5347    0.024
 20-year bond                  102-108/256  3.8243    0.033
 30-year bond                  106-52/256   3.6564    0.033

                               Last (bps)   Net
 U.S. 2-year dollar swap        26.25         0.00
 U.S. 3-year dollar swap        13.50        -0.25
 U.S. 5-year dollar swap         2.75        -0.75
 U.S. 10-year dollar swap       -5.00        -1.25
 U.S. 30-year dollar swap      -40.75        -1.50

 (Reporting by Karen Brettell; Editing by Susan Fenton)

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