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

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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)