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U.S. yields soften after vaulting to one-year highs; sentiment wary

(Updates with market activity, details on yields, context on Biden spending plan and vaccines) By Ross Kerber and Saikat Chatterjee Feb 26 (Reuters) – U.S. Treasury yields subsided in cautious trading on Friday as investors repositioned a day after a watershed rate surge, but growth concerns weighed on sentiment as data showed a strong rebound in consumer spending. The benchmark 10-year U.S. Treasury note’s yield was down 9.3 basis points at 1.422% in afternoon trading, near its session low. On Thursday it touched 1.614%, the highest in a year, rocking world markets. The note’s yield is still up around 50 basis points so far this year and up 33 basis points since Feb. 1 as inflation expectations rose and support grew for President Joe Biden’s $1.9 trillion COVID-19 aid package. Progress in the distribution of vaccines is also expected to help support an economic recovery. Raymond James market analyst Ellis Phifer said Friday’s trading showed investors turning cautious and repositioning after Thursday’s jump. “We moved vertical in rates and there’s a point where things get overdone,” he said. Part of Friday’s decline could also reflect dealers convincing clients to buy bonds after poor demand for a 7-year note auction on Thursday, he added. At the front end of the curve the yield on the 3-month Treasury bill was roughly unchanged at 0.0406% after rising as high as 0.053% on Friday, up from a low of 0.03% at the start of the week. Tom di Galoma, managing director of Seaport Global Holdings, said the trading reflected an “expectation that the Fed may have room to hike rates earlier than was thought as the economy is reflating and vaccinations appear to be working.” U.S. consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 2.4% last month after decreasing 0.4% in December, the Commerce Department said on Friday, setting up the economy for faster growth in the first quarter. A closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 128 basis points, about 7 basis points lower than Thursday’s close. On Thursday, the gap touched 141 basis points, the most since 2015. The overnight U.S. repurchase agreement (repo) rate and the secured overnight financing rate (SOFR) recovered from roughly nine-month lows on Friday, but should remain under pressure this year as the market digests excess cash in the system. SOFR, which measures the cost of borrowing cash overnight using Treasury securities as collateral, was at 0.03% after dropping to 0.01% Wednesday, the lowest since May 2020. SOFR has replaced the London interbank offered rate (LIBOR) as an interest rate benchmark for banks. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 3.1 basis points at 0.1348% on Friday. The yield on 30-year Treasury Inflation Protected Securities was at 0.171%. The 10-year TIPS yield was at -0.734% and the breakeven inflation rate was at 2.090%. February 26 Friday 3:50PM New York / 2050 GMT Price Current Net Yield % Change (bps) Three-month bills 0.04 0.0406 -0.002 Six-month bills 0.05 0.0507 -0.010 Two-year note 99-251/256 0.1348 -0.031 Three-year note 99-136/256 0.2841 -0.053 Five-year note 98-210/256 0.7409 -0.059 Seven-year note 99-234/256 1.1378 -0.070 10-year note 97-64/256 1.422 -0.093 20-year bond 97-40/256 2.0493 -0.153 30-year bond 94-8/256 2.1461 -0.163 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 9.75 2.25 spread U.S. 3-year dollar swap 12.25 3.75 spread U.S. 5-year dollar swap 9.00 1.75 spread U.S. 10-year dollar swap 5.50 1.25 spread U.S. 30-year dollar swap -28.50 2.25 spread (Reporting by Ross Kerber and Saikat Chatterjee. Editing by Mark Potter, Chizu Nomiyama and Sonya Hepinstall)

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