(Adds afternoon pricing, comments)
By Herbert Lash and Sujata Rao
NEW YORK/LONDON, July 20 (Reuters) – Yields on 10-year
Treasuries rebounded from five-month lows on Tuesday after the
previous session’s biggest single-day decline since February, as
traders scrambled to hedge positions amidst the unexpected rally
in U.S. bond prices.
The yield on the benchmark 10-year note has plunged almost
30 basis points in a week after the Federal Reserve persuaded
investors data for June released July 13 showing the biggest
jump of U.S. consumer prices in 13 years was transitory.
The slide in yields has confounded investors, who say
fundamentals suggest the 10-year Treasury will be trading by the
end of this year to yield 2%, or almost double Tuesday’s lows.
What appeared to be short-covering in mid-curve Eurodollars
early in the session initially pulled long end yields down, said
Guy LeBas, chief fixed income strategist at Janney Montgomery
Scott LLC.
“In that sense, there’s not so much of a fundamental driver
on 10-year yields, but rather a trading one,” LeBas said.
Ten-year Treasury yields rose 2.9 basis points
to 1.210%, after tumbling to 1.128% earlier in the session.
The yield on the 30-year Treasury bond gained
5.4 basis points to 1.869%.
Trading was volatile. Ten-year Treasury yields overnight
rose to nearly 1.22%.
Yields on Monday declined as rising COVID-19 infections
globally sparked concerns about the economic outlook and sent
investors scrambling for safety in U.S. and German bonds,
despite relatively robust economic data and corporate earnings.
“Equity markets were pricing an explosion of growth and
margins over the next two to three years and it’s clear now we
won’t have that,” said Ludovic Colin, senior portfolio manager
at Vontobel Asset Management.
Bond markets appeared too pessimistic in starting to price
in a sharp downturn.
“We don’t think we will have recession, just long-term
growth that won’t be as beautiful as what was expected by
investors in the January-March period,” Colin said.
The downward move has been led by the longer end of the
market, flattening the yield curve significantly. Reflecting the
growth concerns, the gap between two-year and 10-year yields
remains below 100 basis points, having been at 122 bps at the
start of July.
The recent moves might be more than convexity hedging from
holders of mortgage securities who are buying duration as well
as receiving fixed-income swaps, said Subadra Rajappa, head of
U.S. rates strategy at Societe Generale in New York.
“But broadly speaking, this seems to be much more flow
driven than just position unwinding,” she said.
The reversal on Treasuries boosted euro zone bonds too, with
10-year German yields extending their fall. They were last down
0.3 basis points at negative 0.415%
Inflation-adjusted 10-year yields inched to minus 1.10%, not
far off the record lows around minus 1.113% last touched in
January.
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, was at 101.5 basis points.
The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 1.6
basis points at 0.194%.
The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.43%.
The 10-year TIPS breakeven rate was last at
2.264%, indicating the market sees inflation averaging about
2.3% a year for the next decade.

July 20 Tuesday 3:01PM New York / 1901 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.05 0.0507 0.000
Six-month bills 0.05 0.0507 0.000
Two-year note 99-222/256 0.1935 -0.016
Three-year note 100-14/256 0.3566 -0.021
Five-year note 100-248/256 0.6754 -0.015
Seven-year note 101-226/256 0.9689 0.005
10-year note 103-212/256 1.2102 0.029
20-year bond 107-192/256 1.784 0.049
30-year bond 111-132/256 1.8694 0.054

DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 8.00 1.00
spread
U.S. 3-year dollar swap 9.25 0.50
spread
U.S. 5-year dollar swap 7.00 1.00
spread
U.S. 10-year dollar swap -1.75 0.75
spread
U.S. 30-year dollar swap -30.75 0.75
spread (Reporting by Sujata Rao; editing by Nick Zieminski and Mark
Heinrich)

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