(Adds breakeven inflation rate, updates prices)
By Karen Brettell
NEW YORK, April 27 (Reuters) - U.S. Treasury yields rose on
Tuesday despite the Treasury Department seeing improved demand
for a $62 billion sale of seven-year notes, while inflation
expectations hit eight-year highs before the Federal Reserve
will on Wednesday conclude its two-day meeting.
Nerves had increased over the seven-year auction after the
maturity drew weak demand at auctions in February and March.
"The seven-year auction was widely anticipated just because
of the bad previous two auctions, so it was nice to see it make
somewhat of a comeback," said Eric Souza, senior portfolio
manager at SVB Asset Management.
The notes sold at a high yield of 1.306%, close to where
they had traded before the auction. Yields increased in the
leadup to the sale, which may have improved demand. Dealers took
a below average share of 22.33% of the debt, indicating solid
investor interest.
On Monday, there was solid demand for $60 billion sale of
two-year notes and $61 billion in five-year notes.
Yields initially dipped on the auction results, before
continuing to march higher. Seven-year yields gained
five basis points to 1.308%, the highest since April 15.
Benchmark 10-year note yields rose six basis
points to 1.627%, the highest since April 20. They have dropped
from a more than one-year high of 1.776% last month.
Inflation expectations also jumped as investors bet that
increased government spending and loose monetary policy will
increase price pressures.
Breakeven rates on 10-year Treasury Inflation-Protected
Securities (TIPS), a measure of expected annual
inflation for the coming decade, rose to 2.41%, the highest
since 2013.
The Fed is expected to acknowledge economic improvement when
it concludes its meeting on Wednesday and investors will watch
for indications of when it may begin to taper its bond
purchases.
"My base expectation is we start seeing the Fed take some
baby steps towards preparing the markets for some kind of
potential announcement on tapering in the middle of the year,"
said Subadra Rajappa, head of U.S. rates strategy at Societe
Generale in New York.
U.S. Gross Domestic Product data due on Thursday is expected
to show strong first-quarter growth as the economy recovered
from COVID-19 related shutdowns.
But the Fed faces a challenge in preparing the market for a
reduction in bond purchases without sparking a "taper tantrum,"
which could send yields spiraling higher and potentially derail
economic progress.
"You definitely don't want a taper tantrum," said Souza. "If
they are thinking of tapering by the end of the year, you need
to start having some sort of hints to the market."
Market participants will also watch to see if the U.S.
central bank raises the interest it pays on excess reserves
(IOER) and overnight reverse repurchase agreements as borrowing
rates in repo intermittently trade negative and short-term bill
yields approach zero.
Overnight repo rates were at one basis point on
Tuesday. They traded as low as minus six basis points last
month.
One-month Treasury bill yields were also one
basis point, after jumping as high as four basis points on
Monday.
The federal funds rate has stayed relatively
steady at seven basis points. Analysts expect the Fed will hike
the IOER if the fed funds rate falls below five basis points.
April 27 Tuesday 4:14PM New York / 2014 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.015 0.0152 -0.008
Six-month bills 0.035 0.0355 -0.002
Two-year note 99-227/256 0.1818 0.003
Three-year note 100-12/256 0.3591 0.010
Five-year note 99-88/256 0.8845 0.034
Seven-year note 99-158/256 1.308 0.046
10-year note 95-120/256 1.627 0.057
20-year bond 95-20/256 2.1824 0.054
30-year bond 90-228/256 2.2989 0.055
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 10.50 -0.50
spread
U.S. 3-year dollar swap 13.00 0.25
spread
U.S. 5-year dollar swap 7.50 -1.75
spread
U.S. 10-year dollar swap -1.25 -0.25
spread
U.S. 30-year dollar swap -27.50 -0.25
spread (Editing by Kirsten Donovan; Editing by David Gregorio and Will
Dunham)
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