TREASURIES-Two-year yields rise to pandemic high, curve flattens on Powell nomination

Credit: REUTERS/DADO RUVIC

By David Randall

NEW YORK, Nov 22 (Reuters) - U.S. Treasury yields rose on Monday after President Joe Biden announced he would nominate Fed Chairman Jerome Powell to a second term while elevating Fed Governor Lael Brainard to vice chair.

Powell, who was widely expected to be tapped for a second term, will helm the U.S. central bank as it begins to pull back its emergency-level support of the economy and tame inflation, which recently hit its highest levels since 1990.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 8.5 basis points at 0.590%, its highest since early March 2020 - before the COVID-19 pandemic was declared - following a weak auction of $58 billion in notes, said Lou Brien, an analyst at DRW Trading.

The Treasury also auctioned $59 billion in five-year notes in a sale that Brien characterized as "less than good," with primary dealers taking the largest percentage of the sale since February. Five-year Treasury yields rose to 1.32%, their highest level since February 2020.

The rising of short-term yields suggests that the market is anticipating a more aggressive tapering move by the Fed in 2022, said Ian Lyngen, head of U.S. Rates Strategy at BMO Capital Markets.

Powell's nomination "certainly puts an earlier lift-off on the table," Lyngen added.

Futures on the federal funds rate 0#FF:, which track short-term interest rate expectations, on Monday priced in a 100% chance of a quarter-point tightening by the Federal Reserve by June next year. The probability was at more than 90% before Biden's announcement.

Powell's nomination "provides a little bit more legitimacy to market pricing in terms of Fed tightening next year," said Mazen Issa, senior currency strategist at TD Securities.

The yield on 10-year Treasury notes US10YT=RR was up 8.9 basis points to 1.625%. The yield on the 30-year Treasury bond US30YT=RR was up 6.6 basis points to 1.973%.

The yield curve flattened, with spreads between 5- and 30-year Treasuries tightening to their lowest levels since March 2020, while the spread between 5- and 10-year Treasuries reached to their lowest since July 2020.

November 22 Monday 4:07PM New York / 2107 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

!Empty value

!Empty value

!Empty value

Six-month bills US6MT=RR

0.07

0.071

0.008

Two-year note US2YT=RR

99-150/256

0.5904

0.085

Three-year note US3YT=RR

99-112/256

0.942

0.096

Five-year note US5YT=RR

99-24/256

1.3152

0.112

Seven-year note US7YT=RR

98-216/256

1.5514

0.113

10-year note US10YT=RR

97-180/256

1.6253

0.089

20-year bond US20YT=RR

99-180/256

2.0181

0.078

30-year bond US30YT=RR

97-200/256

1.9734

0.066

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

26.75

0.75

U.S. 3-year dollar swap spread

21.75

1.50

U.S. 5-year dollar swap spread

11.00

0.50

U.S. 10-year dollar swap spread

5.75

1.75

U.S. 30-year dollar swap spread

-17.25

2.50

(Reporting by David Randall; Editing by Will Dunham)

((David.Randall@thomsonreuters.com; 646-223-6607; Reuters Messaging: david.randall.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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