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

Ross Kerber
·3-min read

(Updates with trading activity, auction result aftermath) By Ross Kerber Feb 25 (Reuters) - U.S. Treasury yields rose to new milestone highs on Thursday as the week's sell-off in bonds on rising inflation fears continued, accelerated by a disappointing auction of 7-year notes at midday. The 10-year yield was up 11.9 basis points at 1.5078%, 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 134 basis points, nine 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. Even before the 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." 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 3.9 basis points at 0.1661%. The yield on 30-year Treasury Inflation Protected Securities was at 0.221% after reaching as high as 0.307%, the highest in a year. The 10-year TIPS yield was at -0.630% and the breakeven inflation rate was at 2.141%. February 25 Thursday 1:26PM New York / 1826 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0475 0.0482 0.015 Six-month bills 0.0625 0.0634 0.012 Two-year note 99-235/256 0.1661 0.039 Three-year note 99-90/256 0.3447 0.104 Five-year note 98-142/256 0.7956 0.170 Seven-year note 97-40/256 1.1786 0.162 10-year note 96-120/256 1.5078 0.119 20-year bond 95-8/256 2.1834 0.109 30-year bond 90-144/256 2.3133 0.071 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.25 -1.75 spread U.S. 3-year dollar swap 7.25 -2.50 spread U.S. 5-year dollar swap 6.25 -5.50 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 and Andrea Ricci)