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TREASURIES-Yield curve steeper on trade hopes, solid auction results

Credit: REUTERS/AKHTAR SOOMRO

Longer-term U.S. Treasury yields were higher on Tuesday and a closely watched part of the yield curve steepened as investors moved into riskier assets on trade hopes and a solid auction of 2-year notes.

By Ross Kerber

Aug 25 (Reuters) - Longer-term U.S. Treasury yields were higher on Tuesday and a closely watched part of the yield curve steepened as investors moved into riskier assets on trade hopes and a solid auction of 2-year notes.US2YT=RR

But risk enthusiasm was tempered after the Conference Board reported that U.S. consumer confidence dropped to a six-year low in August with households worried about the labor market and incomes.

The benchmark 10-year US10YT=RR yield was up 3.9 basis points at 0.6851% in afternoon trading after reaching as high as 0.716% in the morning, its first time above 0.7% since Aug. 17.

The Treasury sold $50 billion worth of 2-year notes, a record amount, at auction on Tuesday at a high yield of 0.155%. The figure matched the results of a similar 2-year auction a month ago and both were the lowest ever, according to Ben Jeffery, BMO Capital Markets rates strategist.

Dealers accounted for 28.7% of accepted bids, compared with an average of 35%, he said, indicating solid demand despite the rush of new issuance by the Treasury to fund economic stimulus measures.

"The fact that these record-large auctions continue to be absorbed without any market distortion is a good sign for them to be able to continue to borrow money at these low yields," Jeffery said.

After the auction, the 2-year Treasury yield, which typically moves in step with interest rate expectations, was up half a basis point at 0.1575% in afternoon trading.

The earlier rise in yields reflected investors' moving out of the safe-haven assets, said Eric Jussaume, director of fixed income at Cambridge Trust.

"It's a risk-on trade environment, so money is coming out of Treasuries," he said. Investors may also be expecting more inflation, he said, expectations that could be clarified when Federal Reserve leaders speak at an annual gathering later this week.

Top U.S. and Chinese trade officials reaffirmed their commitment to a Phase 1 trade deal and discussed how to increase lagging Chinese purchases of American goods, lending support to financial markets on Tuesday.

Although the S&P 500 opened at a record high on Tuesday on the trade news, by afternoon it was little changed with investors moving to the sidelines following a three-day rally.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at 53 basis points, about 3 basis points higher than Monday's close and well above its recent low of 33 basis points reached on July 24.

August 25 Tuesday 1:59PM New York / 1759 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

0.1

0.1014

-0.003

Six-month bills US6MT=RR

0.115

0.117

-0.005

Two-year note US2YT=RR

99-240/256

0.1575

0.005

Three-year note US3YT=RR

99-210/256

0.1857

0.011

Five-year note US5YT=RR

99-198/256

0.2963

0.016

Seven-year note US7YT=RR

99-60/256

0.4875

0.028

10-year note US10YT=RR

99-108/256

0.6851

0.039

20-year bond US20YT=RR

99-16/256

1.1778

0.046

30-year bond US30YT=RR

99-156/256

1.391

0.042

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

7.00

0.50

U.S. 3-year dollar swap spread

6.00

0.00

U.S. 5-year dollar swap spread

4.50

0.25

U.S. 10-year dollar swap spread

-1.00

0.00

U.S. 30-year dollar swap spread

-37.25

0.75

(Reporting by Ross Kerber in Boston; editing by Jonathan Oatis and Leslie Adler)

((ross.kerber@thomsonreuters.com; (617) 856 4341; Reuters Messaging: Ross.Kerber.Reuters.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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