(Adds quote, updates yields) By Karen Brettell NEW YORK, Oct 23 (Reuters) - Benchmark U.S. Treasury yields retraced from four-month highs reached earlier in the day on Friday as investors waited to learn whether U.S. lawmakers will strike a deal on new fiscal stimulus. U.S. House Speaker Nancy Pelosi said on Friday it still was possible to get another round of COVID-19 aid before the Nov. 3 election, but that it was up to President Donald Trump to act, including bringing along reluctant Senate Republicans. Even if a deal is not reached, investors see a jump in spending as likely if Democrat Joe Biden wins the Nov. 3 election, with a larger bill more also more likely if Democrats win control of the U.S Senate. “The market’s playing out inflation expectations here, based on expectations that there’s more stimulus and, if Biden gets in, that they will do even more spending than we’ve done under the current administration,” said Lou Brien, a market strategist at DRW Trading in Chicago. New fiscal spending should improve the U.S. economic outlook and raises the prospect of higher inflation, which would send yields higher. The Federal Reserve has also said that it will allow inflation run hotter than previously before tightening monetary policy. A glut of Treasury supply to finance the spending could also weigh on the U.S. bond market. Benchmark 10-year Treasury yields rose as high as 0.872%, the highest since June 9, before falling back to 0.841%. The yields are edging above their 200-day daily moving average, which they have held under since December 2018. The yield curve between two-year and 10-year notes steepened as far as 71 basis points, the widest spread since June 5. If the election result is delayed it could dampen risk appetite and increase demand for U.S. bonds, said Zachary Griffiths, an interest rate strategist at Wells Fargo in Charlotte. "Over the next couple of weeks we think the risks are to the downside, particularly the long term yields given the big back up that we’ve seen for the past couple of weeks," he said. Analysts also caution that ongoing economic weakness and global demand for yield could limit any large increase in bond yields. The Fed is also expected to shift more of its bond purchases to longer-dated debt if it sees yields rising faster than economic growth warrants. Investors have been positioning for rate increases via the eurodollar options and swaptions markets, and any bout of profit taking in these trades could also pull yields back lower. October 23 Friday 3:00PM New York / 1900 GMT Price US T BONDS DEC0 172-20/32 0-9/32 10YR TNotes DEC0 138-96/256 0-12/256 Price Current Net Yield % Change (bps) Three-month bills 0.0925 0.0938 0.003 Six-month bills 0.1125 0.1141 0.002 Two-year note 99-241/256 0.1554 0.000 Three-year note 99-198/256 0.2016 -0.002 Five-year note 99-106/256 0.3701 -0.005 Seven-year note 98-116/256 0.6033 -0.005 10-year note 97-248/256 0.8413 -0.007 20-year bond 95-32/256 1.4079 -0.013 30-year bond 93-168/256 1.6451 -0.013 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.25 0.25 spread U.S. 3-year dollar swap 7.75 0.25 spread U.S. 5-year dollar swap 6.75 0.00 spread U.S. 10-year dollar swap 2.75 0.50 spread U.S. 30-year dollar swap -34.25 1.00 spread (Editing by Nick Zieminski and Chizu Nomiyama)
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