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Yields dip, TIPS breakevens backpedal amid virus and stimulus concerns

(Recasts, updates yields, adds analysts’ comments) Jan 22 (Reuters) – U.S. Treasury yields drifted lower on Friday as the market benefited from a risk-off sentiment sparked in part by coronavirus concerns and a bumpy road ahead for President Joe Biden’s massive economic rescue package. Concerns about a drawn-out rollout of vaccines and growth recovery also punctured a sharp run-up in one of the important bond market gauges of inflation sentiment. The benchmark 10-year yield was last down 2 basis points at 1.0872%. Markets were experiencing a little more risk aversion that was pushing stocks lower while lifting Treasury prices and easing yields, according to Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. “The virus is more in the focal point. There’s a lot of doubt whether the whole $1.9 trillion stimulus package is going to get through,” she said, referring to some resistance in the U.S. Congress to Biden’s plan to aid the virus-battered economy. Expectations of another major round of stimulus getting through a Democrat-controlled White House and Congress had boosted Wall Street and propelled the 10-year Treasury yield earlier this month to its highest levels since March on worries of a supply deluge to finance federal spending. A majority of economists in a Reuters poll said the Democratic president’s plan will boost the economy significantly and they expect it to return to its pre-pandemic size within a year. The Senate Finance Committee on Friday unanimously approved Janet Yellen’s nomination as the first woman Treasury secretary, indicating that she will easily win full Senate approval. The inflation breakeven rate for 10-year Treasury Inflation-Protected Securities (TIPS) dropped after climbing to 2.182%, its highest level since May 2018, following Thursday’s strong auction of $15 billion in the securities. The TIPS breakeven rate was last at 2.018%, still indicating the market expects inflation to average more than 2% a year for the next decade, above the current pace of inflation. Paula Solanes, a senior portfolio manager at SVB Asset Management, said elevated inflation for an extended period of time will be a bit challenging in the near term. “I do understand the demand for TIPS because eventually you are likely to experience or see more inflation, especially with the unprecedented amount of monetary stimulus and now fiscal stimulus,” Solanes said. “I’m a little bit hesitant to factor in inflation in the next year to an over 2% clip at this point.” Looking ahead to next week, the U.S. Federal Reserve will hold its first meeting of 2021. Rupert said while potential tapering of Fed bond purchases, the virus, the new Biden administration, and other subjects were likely to be discussed, the central bank’s end-of-meeting statement will be “uneventful.” “It will just be more of the same: ‘We’re in it for the long run. Rates are low. We’ll do what’s necessary,'” she said. The coming week will also bring a burst of supply with record-large auctions of $60 billion of two-year notes on Monday, $61 billion of five-year notes on Tuesday and $62 billion of seven-year notes on Thursday. A surge in U.S. manufacturing activity to its highest level in more than 13-1/2-years in early January showed bottlenecks in the supply chain caused by the COVID-19 pandemic are driving up prices and signaling a rise in inflation in the months ahead. Data firm IHS Markit said its flash U.S. manufacturing PMI accelerated to a reading of 59.1 in the first half of this month, the highest since May 2007, from 57.1 in December. Economists had forecast the index slipping to 56.5 in early January. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was unchanged at 0.125%. A closely watched part of the yield curve measuring the gap between yields on two- and 10-year Treasury notes was last down 2 basis points at 96.25 basis points. January 22 Friday 3:24PM New York / 2124 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0775 0.0786 -0.002 Six-month bills 0.0875 0.0888 -0.002 Two-year note 100 0.125 0.000 Three-year note 99-208/256 0.1883 -0.003 Five-year note 99-186/256 0.4311 -0.016 Seven-year note 99-20/256 0.7618 -0.018 10-year note 98-8/256 1.0872 -0.020 20-year bond 95-72/256 1.6554 -0.022 30-year bond 94-208/256 1.8522 -0.019 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 0.00 spread U.S. 3-year dollar swap 7.50 -0.25 spread U.S. 5-year dollar swap 9.25 1.00 spread U.S. 10-year dollar swap 2.25 1.50 spread U.S. 30-year dollar swap -24.75 1.25 spread (Reporting by Herbert Lash in New York and Karen Pierog in Chicago Editing by Mark Heinrich)

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