U.S. yields ease after hitting 3-1/2 year highs on rate hike unease By Reuters

By Herbert Lash

NEW YORK (Reuters) -Yields on most U.S. Treasury notes pared early gains to trade lower on Monday as bargain-hunters stepped in after the benchmark 10-year yield hit fresh 3-1/2 year highs as inflation fears continued to roil markets.

The yield on traded little changed on the day at 3.127%, after earlier hitting 3.20%, a level last seen in November 2018.

“This is just short-covering on domestic accounts that have been short the market, taking a look at buying them back,” said Tom di Galoma, managing director at Seaport Global Holdings LLC. “There’s certainly some bargain hunting.”

Investors buy back borrowed securities to cover short positions, often leading to swings in the market. Sharply rising yields knock prices lower as bond yields move inversely to prices.

The long end of the yield curve has been steepening, pushing the gap between two- and 30-year notes up from a low of 38.76 on Friday to a high of 61.87 on Monday, Refinitiv data showed.

“People are taking advantage of moving out the curve,” di Galoma said. “I’ve seen accounts extend from the very front end of the market to the long end just because the yield curve has steepened so much,” he said.

Yields on Treasury debt have roughly doubled since early March as the Federal Reserve took a hawkish stance and began hiking interest rates that month for the first time since late 2018 to curb soaring inflation.

The Fed can stick to half-point rate hikes for the next two- to three meetings then assess how the economy and inflation are responding before deciding whether further rises are needed, Atlanta Fed President Raphael Bostic said.

“I don’t think we need to be moving even more aggressively,” Bostic said in comments to Bloomberg on Monday.

The U.S. consumer price index is expected to show on Wednesday the pace of core CPI in April slowed to 6.0% and headline CPI to 8.1% from 6.5% and 8.5%, respectively, the month before, according to economists polled by Refinitiv.

The Treasury will auction $45 billion of three-year notes on Tuesday and $36 billion of 10-year notes on Wednesday.

The spike in longer-dated bond yields has outpaced the short-end of the curve, pushing the spread differential between two- and 10-year debt to its widest level in nearly three months.

The closely watched gap between two- and 10-year yields , seen as an indicator of economic expectations, was at 47.8 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.161%.

The 10-year TIPS breakeven rate was last at 2.815%, indicating the market sees inflation averaging about 2.8% a year for the next decade.

Yields on inflation-linked debt on U.S. bonds hit fresh multi-year highs, with yields on five-year maturities rising to their highest levels since March 2020.

The yield on 10-year Treasury Inflation-Protected Securities was last up 6 bps at 0.35%, also the highest in two years.

May 9 Monday 10:29 AM New York / 1429 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 0.835 0.8483 0.000

Six-month bills 1.315 1.3419 -0.018

Two-year note 99-184/256 2.647 -0.049

Three-year note 99-82/256 2.868 -0.045

Five-year note 98-200/256 3.0156 -0.030

Seven-year note 98-128/256 3.1159 -0.015

10-year note 89-136/256 3.1268 0.003

20-year bond 84-80/256 3.4789 0.028

30-year bond 80-220/256 3.2593 0.038

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 30.75 -1.00

spread

U.S. 3-year dollar swap 17.00 -1.25

spread

U.S. 5-year dollar swap 6.25 -1.00

spread

U.S. 10-year dollar swap 5.50 -0.25

spread

U.S. 30-year dollar swap -27.50 -1.00

spread