TREASURIES-U.S. yields extend rise after soft 20-year auction; curve steepens for 2nd day

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* U.S. 10-year yield hits 5-month high * U.S. 5-year yield matches 7-month peak hit Monday * U.S. 20-yar auction results show weak demand (Updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Oct 20 (Reuters) - U.S. long-dated Treasury yields rose on Wednesday after a weak auction of 20-year bonds, with the yield curve steepening for a second day and investors paring back aggressive monetary tightening bets from the Federal Reserve. Prior to the curve steepening this week, the yield curve had flattened the last few sessions on expectations that the Fed will raise interest rates earlier than expected, pushing short-dated yields higher. U.S. yields also extended gains after a softer-than-expected 20-year auction that saw the yield at 2.1%, higher than the expected rate at the bid deadline, suggesting investors demanded a higher premium for the bond. "It looks as though not even a significant cheapening in the issue could boost demand given rising inflation concerns and the generally bearish momentum in Treasuries since the September 22 FOMC," said Kim Rupert, managing director, fixed income at Action Economics in San Francisco. There were $54.1 billion in bids for a 2.25 bid-to-cover, lower than 2.36 last month and the 2.35 average. Action Economics said this was the third lowest bid-to-cover on record for the 20-year bond, which the Treasury started selling again in May 2020. Overnight, the U.S. 10-year yield climbed to a five-month peak of 1.673%, while that on the 5-year note matched a seven- month high of 1.193% hit on Monday. The rise in long-dated yields steepened the curve again, with the spread between U.S. 5-year notes and U.S 30-year bonds at nearly 97 basis points. "Central bank tightening fever in Europe cooled off overnight, removing immediate pressure for consistently higher intermediate yields," wrote Jim Vogel, senior rates strategist, at FHN Financial, in a research note. "That also reduces the curve flattener demand for long U.S. Treasuries at least for today." On Tuesday, European Central Bank chief economist Philip Lane said market expectations for future interest rates do not square with the ECB's guidance for no hike until inflation is seen stable at 2%. Analysts said the move higher overnight in U.S. long-dated yields was spurred by comments from Fed Governor Christopher Waller late Tuesday, saying the Fed may have to adopt "a more aggressive policy response" if high inflation continues through the end of the year. Waller's views, however, differed from that of Fed Governor Randal Quarles, who said on Wednesday that while it is time for the Fed to begin dialing down its bond-buying program, it would be premature to start raising interest rates in the face of high inflation that is likely to recede next year. Futures on the U.S. federal funds rate, which track short-term interest rate expectations, continued to price in a rate increase next year, although, the percentages have come down. On Wednesday, futures traders reduced the chances of a quarter-point tightening by the Fed in June to 46%, from 60% on Monday. Traders also pared back the odds of a rate hike in July to 62% from 82% on Monday. In afternoon trading, the benchmark 10-year note yield was up one basis point at 1.6461%. The U.S. 5-year yield, which reflects monetary policy expectations, was last down at 1.1538%. U.S. 20-year yields rose to one-week highs of 2.106%, and were last up 3 basis points at 2.1003%. U.S 30-year yields also touched one-week peaks of 2.136% and were last up 4 basis points at 2.1293%. October 20 Wednesday 3:47PM New York / 1947 GMT Price Current Net Yield % Change (bps) Three-month bills 0.05 0.0507 -0.005 Six-month bills 0.055 0.0558 -0.005 Two-year note 99-193/256 0.3773 -0.016 Three-year note 99-198/256 0.7019 -0.008 Five-year note 98-170/256 1.1538 -0.001 Seven-year note 98-152/256 1.4637 0.000 10-year note 96-104/256 1.6479 0.014 20-year bond 94-80/256 2.1023 0.035 30-year bond 97-28/256 2.1314 0.045 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 17.00 1.25 spread U.S. 3-year dollar swap 14.75 0.25 spread U.S. 5-year dollar swap 7.00 0.25 spread U.S. 10-year dollar swap 0.75 0.50 spread U.S. 30-year dollar swap -23.00 0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski, Will Dunham and Kirsten Donovan)

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