TREASURIES-Inflation bets, poor auction send yields up to new milestones

Ross Kerber
·4-min read

(Updates with market activity, details on jobless claims and stocks) By Ross Kerber Feb 25 (Reuters) - U.S. Treasury yields rose to new milestones on Thursday as the week's sell-off in bonds on rising economic expectations and inflation concerns continued, accelerated by a disappointing auction of 7-year notes at midday. The 10-year yield was up 15.7 basis points at 1.5459%, and touched as high as 1.614%, the highest in a year. A big move came in the early afternoon when an auction for $62 billion of 7-year notes by the U.S. Treasury showed poor demand, with a bid-to-cover ratio of 2.04, the lowest on record according to a note from DRW Trading market strategist Lou Brien who called the result "terrible." The trading also pushed up 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. It went as wide as 141 basis points, the most since 2015, and was last at 137 basis points, 13 more than at Wednesday's close. Other parts of the yield curve also steepened. Analysts said the trading showed investors positioning for price increases on goods and services internationally, even after top U.S. Federal Reserve and European Central Bank officials tried to talk down rising yields. "It's starting to become a momentum trade and the sell-off is becoming a global phenomenon," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. Fewer Americans filed new claims for unemployment benefits last week amid falling COVID-19 infections, Labor Department figures showed on Thursday, suggesting the labor market was slowly regaining traction. Wall Street's main indexes dropped on Thursday, with the Nasdaq on track for its worst day in four months, as technology-related stocks remained under pressure after the rise in bond yields. Even before Thursday's auction, yields on five-year and seven-year notes, the "belly" or middle of the curve, had risen significantly, following weak demand for a 5-year auction on Wednesday. Analysts said the moves could reflect holders of mortgage-backed securities selling the bonds as they reduce risks on loans they manage, known as "convexity hedging." Eurodollar futures, which track short-term U.S. interest rate expectations over the next few years, have priced in a U.S. rate hike by March 2023. This pricing has been pulled forward from late-2023 in the past few weeks. Similarly Fed funds futures are pricing in a rate hike in early 2023, now in line with Eurodollar futures. The U.S. secured overnight financing rate (SOFR), which measures the cost of borrowing cash overnight using Treasury securities as collateral, was at 0.02% on Thursday after dropping to 0.01% on Wednesday, the lowest since May 2020. SOFR has replaced the London interbank offered rate (LIBOR) as an interest rate benchmark for banks. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 4.3 basis points at 0.1701%. The yield on 30-year Treasury Inflation Protected Securities was at 0.239% after reaching as high as 0.307%, the highest in a year. The 10-year TIPS yield was at -0.6% and the breakeven inflation rate was at 2.172%. February 25 Thursday 3:32PM New York / 2032 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0425 0.0431 0.010 Six-month bills 0.06 0.0609 0.010 Two-year note 99-233/256 0.1701 0.043 Three-year note 99-92/256 0.342 0.101 Five-year note 98-112/256 0.8198 0.194 Seven-year note 96-224/256 1.2218 0.205 10-year note 96-32/256 1.5459 0.157 20-year bond 93-192/256 2.266 0.192 30-year bond 90-12/256 2.3388 0.097 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 -0.50 spread U.S. 3-year dollar swap 9.00 -0.75 spread U.S. 5-year dollar swap 7.00 -4.75 spread U.S. 10-year dollar swap 3.75 -2.25 spread U.S. 30-year dollar swap -31.25 -3.50 spread (Reporting by Ross Kerber in Boston; Editing by Jonathan Oatis, Andrea Ricci and Sonya Hepinstall)