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TREASURIES-Yields jump after Fed's Powell offers more inflation tolerance

Thu, 27th Aug 2020 20:22

(Updates yields, adds analyst comment and note auction results)
By Ross Kerber
Aug 27 (Reuters) - Longer-term U.S. Treasury yields climbed
to their highest levels in months on Thursday, steepening the
yield curve, after Federal Reserve Chairman Jerome Powell
announced a new policy framework promoting higher inflation to
spur economic recovery and job creation.
The benchmark 10-year yield was last up 5.5
basis points at 0.7423%, its highest since June 19, while the
yield on the 30-year bond was 9 basis points higher
at 1.496%.
Speaking at the Kansas City Fed's virtual economic
symposium, Powell said the U.S. central bank would allow periods
of inflation above its current 2% target level before hiking
interest rates as part of an aggressive new strategy to restore
full employment and lift super-low inflation back to healthier
levels.
Powell "has basically said it's an inflation target in name
only, and that brought in sellers," said Tom di Galoma, managing
director of Seaport Global Holdings.
Priya Misra, global head of rates strategy at TD Securities
in New York, said the market was disappointed that Powell did
not signal near-term easing, such as quantitative easing, to
keep long-term rates low.
"I think he set up the conceptual framework for the Fed to
ease in September, but I think the market wanted a more explicit
hint today," she said.
Meanwhile, the U.S. Treasury's $47 billion, seven-year note
auction was met with strong demand, resulting in a high yield of
0.519% and a bid-to-cover ratio of 2.47.
Demand was also good for sizable auctions earlier this week
of two- and five-year notes.
On the economic data front, the number of Americans filing
new claims for unemployment benefits hovered around 1 million
last week, as expected, suggesting the labor market recovery was
stalling as the COVID-19 pandemic drags on and financial aid
from the government dries up.
The Commerce Department's revision to second-quarter GDP
showed the economy contracted at a 31.7% annual rate during the
peak of coronavirus shutdowns, only a bit less dire than its
report last month indicating a 32.9% decline.
A closely watched part of the U.S. Treasury yield curve
measuring the gap between the yields on two- and 10-year
Treasury notes, seen as an indicator of economic
expectations, was last at 58.30 basis points, about 4.7 basis
points higher than Wednesday's close and its highest since June
10.
August 27 Thursday 2:36PM New York / 1936 GMT



Price Current Net
Yield % Change
(bps)
Three-month bills 0.1 0.1014 0.002
Six-month bills 0.11 0.1119 0.000
Two-year note 99-239/256 0.1583 0.004
Three-year note 99-210/256 0.1858 0.006
Five-year note 99-184/256 0.3067 0.017
Seven-year note 99 0.5222 0.037
10-year note 98-224/256 0.7423 0.055
20-year bond 97-84/256 1.2771 0.084
30-year bond 97-20/256 1.4964 0.090

DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 8.50 0.75
spread
U.S. 3-year dollar swap 7.50 1.00
spread
U.S. 5-year dollar swap 5.75 0.75
spread
U.S. 10-year dollar swap -0.50 -0.25
spread
U.S. 30-year dollar swap -37.25 -1.25
spread





(Reporting by Ross Kerber in Boston; Additional reporting by
Karen Pierog in Chicago; Editing by Jonathan Oatis and Andrea
Ricci)

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