June 11, 2020 / 2:41 PM / 2 months ago

TREASURIES-Yields fall as yield curve control remains in question

    CHICAGO, June 11 (Reuters) - U.S. Treasury yields continued
their downward trajectory on Thursday, with the longer end of
the curve falling harder as the market pondered whether the
Federal Reserve would turn to yield curve control in the coming
    The benchmark 10-year yield was last down 7.4
basis points at 0.674%.   
    "It's entirely too early for trades to be put on for yield
curve control because as much as we do seem to be heading in
that direction, nothing that we got from the Fed yesterday
really suggests that it's a particularly near-term prospect,"
said Tom Simons, money market economist at Jefferies in New
    Under yield curve control, the Fed would target a particular
yield and buy enough bonds to keep the rate from rising above
that target level.
    On Wednesday, Fed Chairman Jerome Powell said policymakers
had a full discussion about employing yield curve controls, but
for now would continue with the Fed's current level of purchases
of Treasury bonds and mortgage-backed securities.
    Simons said that if the Fed were to opt for yield curve
control, it would make more sense to target the front end of the
curve while making fixed purchases for longer maturities, with
the consistent buying helping to keep yields lower.
    Expectations that the Fed will cap short-dated Treasury
yields has increased demand for trades that benefit from yield
curve steepening. Investors are betting that short-term rates
will be held down by the Fed's low rate policy, while long-dated
debt will be hurt by improving economic expectations and
increasing Treasury supply.
    A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year Treasury
notes, which is viewed as an indicator of
economic expectations, was at 49.10 basis points, about 6 basis
points lower than at Wednesday's close.
    It reached 72 basis points on Friday, the steepest since
March, after data showed the U.S. economy unexpectedly added
jobs in May.
    Later on Thursday, the Treasury will sell $19 billion of
30-year bonds. With the 30-year yield falling ahead of the sale,
Simons said, "It's going be so rich that who's going to want to
bid through whatever market level is prevailing at the time?"  
    The 30-year yield was last down 9.2 basis points
 at 1.428%.
    Bids submitted in a Thursday morning overnight repurchase
agreement operation totaled $47.85 billion, according to the New
York Federal Reserve, which said it accepted all the bids.
    June 11 Thursday 8:48AM New York / 1348 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.1725       0.1755    0.003
 Six-month bills               0.18         0.1827    -0.002
 Two-year note                 99-228/256   0.1807    0.002
 Three-year note               100-30/256   0.2108    -0.005
 Five-year note                99-182/256   0.3087    -0.028
 Seven-year note               99-240/256   0.5091    -0.055
 10-year note                  99-136/256   0.6739    -0.074
 20-year bond                  98-128/256   1.2099    -0.089
 30-year bond                  95-172/256   1.4282    -0.092
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         7.75        -0.75    
 U.S. 3-year dollar swap         5.25        -1.00    
 U.S. 5-year dollar swap         5.50        -0.25    
 U.S. 10-year dollar swap       -0.75         0.00    
 U.S. 30-year dollar swap      -46.75        -0.50    

 (Reporting by Karen Pierog; Editing by Dan Grebler)
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