TREASURIES-Yields lower, curve flatter ahead of Fed

(New throughout)
By Kate Duguid
NEW YORK, Dec 11 (Reuters) - A risk-off move drove Treasury
yields down across maturities on Friday, with the two-year yield
falling to a four-month low, furthering speculation that the
Federal Reserve may announce adjustments to its Treasury
purchases at next week's meeting.
The fall in yields was partly attributable to reports that
congressional wrangling over a spending package and coronavirus
aid could drag on through Christmas. Also pulling yields lower
was news that European pharmaceutical companies Sanofi SA
and GlaxoSmithKline Plc would delay the launch
of their COVID-19 vaccine until late next year, a setback in the
global fight against the pandemic.
Those macroeconomic drivers explain the fall in the
benchmark 10-year yield and the 30-year bond yield
to their lowest since Dec. 1. In afternoon trade,
both had pulled back from those lows, with the 10-year last down
1.5 basis points at 0.892% and the 30-year down 1.4 basis points
at 1.622%.
The move in the two-year yield to its lowest
since Aug. 7, however, was surprising, as the yield has been
roughly anchored since the Fed moved interest rates to zero at
the beginning of the pandemic. It was last down 2 basis points
at 0.119%.
Analysts argued the two-year move was likely not purely the
result of macroeconomic drivers. Yields on Treasury bills - debt
with a maturity of one year or less - are all less than 10 basis
points away from 0%, according to Tradeweb data.
"The idea that bills could potentially go to zero is taking
twos, threes and fives along with it," said Justin Lederer,
Treasury analyst and trader at Cantor Fitzgerald.
Since the lows hit in March, the 10-year yield has risen
more than 60 basis points, and the 30-year has risen nearly 100.
The two-year yield, by comparison, was just a basis point and a
half higher than the all-time low it hit in May.
Both long rates have increased enough in the past several
months that some analysts believe the Fed will purchase more
longer-dated debt to cap yields and keep borrowing costs low.
Since March the Fed has bought more than $2 trillion worth of
Treasury debt, most of it in shorter-dated notes.
If the Fed were to lengthen the average maturity of its
Treasury holdings - by purchasing the same amount but buying
more longer-dated debt and less shorter-dated debt - it could
also have the effect of bolstering Treasury bills and
shorter-dated notes away from zero.
"I can see the Fed trying to do something to alleviate that.
They definitely don't want bills trading negative, or repo
trading negative," said Lederer.

December 11 Friday 4:14PM New York / 2114 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.0725 0.0735 -0.006
Six-month bills 0.0825 0.0837 0.000
Two-year note 100-3/256 0.119 -0.020
Three-year note 99-216/256 0.1772 -0.019
Five-year note 100-16/256 0.3623 -0.021
Seven-year note 100 0.625 -0.021
10-year note 99-212/256 0.8931 -0.015
20-year bond 99-76/256 1.4156 -0.016
30-year bond 100-12/256 1.623 -0.013

DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 7.50 0.25
spread
U.S. 3-year dollar swap 6.00 0.00
spread
U.S. 5-year dollar swap 5.50 0.00
spread
U.S. 10-year dollar swap -1.00 -0.50
spread
U.S. 30-year dollar swap -29.00 -1.00
spread


(Reporting by Kate Duguid; Editing by Ken Ferris and Jonathan
Oatis)