TREASURIES-Yields ease from two-year highs, Treasury to sell 20-year bonds

·3 min read

By Karen Brettell NEW YORK, Jan 19 (Reuters) - U.S. Treasury yields eased after hitting fresh two-year highs earlier on Wednesday as traders prepared for more aggressive Federal Reserve policy this year, and before the Treasury will sell new 20-year debt. Money market investors have ramped up their expectations of central bank rate hikes from the world's top central banks this year as multi-decade-high inflation readings forced them to revise their forecasts. Much of the move higher in U.S. Treasury yields has been led by so-called real yields, which adjust for expected inflation. “Real yields are responding to the faster expected pace of withdrawal both in terms of hikes as well as in terms of balance sheet support,” said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York. Hawkish comments from Fed officials in recent weeks have added to investors repricing for more hawkish monetary policy this year. Investors are fully pricing in a rate hike at the Fed’s March meeting, and three more hikes this year. The Fed's January meeting next week will also be scrutinized for any clues on whether the U.S. central bank will speed up the end of its bond purchase program, and when it is likely to begin reducing the size of its massive balance sheet. Benchmark 10-year note yields rose as high as 1.902% on Wednesday, and five-year yields reached 1.693%, both the highest since January 2020. Two-year note yields jumped to 1.076%, the highest since February 2020. Yields on five-year Treasury Inflation-Protected Securities(TIPS), or real yields, rose to minus 1.05%, and are up from minus 1.98% in November, though they remain negative, meaning that inflation is expected to exceed the yields on the bonds. Yields on 10-year TIPS gained to minus 0.59%. The Treasury Department will sell $20 billion in 20-year bonds on Wednesday, which will provide some insight into the appetite of investors to buy at higher yields. The yields were last at 2.236%, after earlier reaching 2.28%, the highest since May 2021. The Treasury will also sell $16 billion in 10-year TIPS on Thursday. Seasonal factors after Thursday’s TIPS auction could help stabilize the market, at least temporarily, as yields typically fall after auctions of the inflation-linked debt, said Cohn. “There does tend to be a seasonal wherein real yields decline about 10 basis points on average after new issues in the three weeks following the auction,” Cohn said, adding that “in the near term I think we could see a bit of a respite.” Longer-term, however, Cohn says yields are likely to continue higher through the year. Data on Wednesday showed that U.S. homebuilding unexpectedly increased in December amid unseasonably mild weather, but soaring prices for materials after the government nearly doubled duties on imported Canadian softwood lumber could hamper activity in the coming months. January 19 Wednesday 9:57AM New York / 1457 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1775 0.18 0.002 Six-month bills 0.37 0.3758 0.000 Two-year note 99-127/256 1.0123 -0.028 Three-year note 99-112/256 1.3177 -0.034 Five-year note 98-64/256 1.6196 -0.029 Seven-year note 97-66/256 1.7967 -0.023 10-year note 95-192/256 1.8503 -0.018 20-year bond 96-60/256 2.2362 -0.019 30-year bond 93-128/256 2.1722 -0.014 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 19.00 0.00 spread U.S. 3-year dollar swap 15.50 0.50 spread U.S. 5-year dollar swap 8.25 -0.25 spread U.S. 10-year dollar swap 5.75 0.00 spread U.S. 30-year dollar swap -19.50 -0.50 spread (Reporting by Jonathan Oatis; Editing by Jonathan Oatis)