May 2, 2018 / 3:36 PM / 6 months ago

TREASURIES-U.S. yields slip after quarterly refunding plan

    * U.S. ADP report shows job gains of 204,000 
    * U.S. 2-year yields hit 9-1/2-year peak
    * U.S. Treasury to raise debt auction size

 (Recasts, adds comment, updates prices, table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 2 (Reuters) - U.S. Treasury yields fell on
Wednesday as a quarterly refunding program that aims to finance
the country's massive fiscal deficit came in short of
expectations, reducing the pressure on prices caused by the
increase in debt supply.
    Treasury yields had risen overnight in the run-up to the
refunding announcement. While the U.S. Treasury did increase the
size of the auctions, analysts said the overall outcome was
somewhat underwhelming.
    Treasury announced a $73-billion refunding package for May,
up from the $66 billion in February, with bulk of the increase 
coming from short-end maturities. Treasury will sell $31 billion
in 3-year notes, $25 billion in 10-year notes, and $17 billion
in 30-year bonds.
    Treasury will raise the size of the 2- and 3-year note
auctions by just $1 billion per month in the second quarter,
compared with the $2 billion increases in the first. 
    "The rally was mostly due to the refunding," said Jim Vogel,
interest rates strategist, at FTN Financial in Memphis,
Tennessee.
    "There are no TIPS (Treasury Inflation Protected Security)
increases, which tends to reduce the effective duration of the
forward auctions. Second, the increases from the 5s through 30s 
were modest compared to the upper band of expectations," he
added.
    The yield curve flattened a bit after the Treasury
announcement, with the spread between U.S. 5-year notes and
30-year bonds tightening to 31.0 basis points. 
    The refunding announcement overshadowed a U.S.
private-sector payrolls for April that came roughly in line with
forecasts, cementing expectations of a rate increase in June.
    Before release of the payrolls data, yields on the U.S.
two-year note, the maturity most sensitive to the rate increase
outlook, hit their highest in more than nine years. 
    Payrolls processor ADP said U.S. private sector employment
grew by 204,000 last month, slightly exceeding expectations of
200,000 jobs.
    "The data are slightly stronger than seems consistent with
consensus expectations for payrolls in the BLS (Bureau of Labor
Statistics) report on Friday," said Jim O'Sullivan, chief
economist, at High Frequency Economics. "However, the usual
caveat: ADP is far from infallible for signaling the BLS data."
    The U.S. non-farm payrolls data is due out on Friday, with
the market expecting an addition of 192,000 jobs, according to a
Reuters poll.
    In midday trading, U.S. 10-year yields were at 2.973 percent
, slightly down from 2.976 percent late on Tuesday. 
    U.S. 30-year yields fell to 3.133 percent, from
Tuesday's 3.137 percent.
    On the front-end of the curve, U.S. two-year yields hit a
9-1/2-year high of 2.521 percent. They were last at
2.512 percent.
    
    May 2 Wednesday 11:25AM New York / 1525 GMT
                               Price                  
 US T BONDS JUN8               143-9/32     0-4/32    
 10YR TNotes JUN8              119-108/256  0-12/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.815        1.8487    -0.005
 Six-month bills               1.985        2.033     -0.003
 Two-year note                 99-188/256   2.5125    0.000
 Three-year note               99-54/256    2.6546    0.003
 Five-year note                99-176/256   2.8175    -0.003
 Seven-year note               99-168/256   2.9297    -0.007
 10-year note                  98-32/256    2.9719    -0.004
 30-year bond                  97-112/256   3.1328    -0.004
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        26.25         1.25    
 spread                                               
 U.S. 3-year dollar swap        21.75         0.50    
 spread                                               
 U.S. 5-year dollar swap        11.75         0.75    
 spread                                               
 U.S. 10-year dollar swap        3.00         0.25    
 spread                                               
 U.S. 30-year dollar swap      -11.50         0.00    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu
Nomiyama and David Gregorio)
  
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