TREASURIES-Yields drop on safety demand as stocks fall, Ukraine risks weigh

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(New throughout, updates prices, market activity and comments, adds details on reverse repo demand) By Karen Brettell NEW YORK, Jan 21 (Reuters) - U.S. Treasury yields fell on Friday as stock market declines reflected poor risk appetite and as concerns about potential conflict in Ukraine increased demand for the safe haven debt. Yields have jumped this month as investors adjusted to the likelihood that the Federal Reserve will tighten monetary policy more aggressively to stave off unabated inflation. Rising yields also spooked stock markets, and analysts say the rapid march higher was due for a pause. "We got to where we got to very fast so you’re always liable to have a little bit of a pause for thought, and there is evidence of some players coming in and looking at this," said Padhraic Garvey, regional head of research, Americas at ING. Demand for U.S. government debt has also increased on concerns about potential conflict in Ukraine. "Clearly if the Ukraine story was to go wrong there would be quite a significant bid for Treasuries, and this notion of the 10-year getting to 2% would be put on hold until we really understand what the implications of such a move would be," Garvey said. The top U.S. and Russian diplomats made no major breakthrough at talks on Ukraine on Friday but agreed to keep talking to try to resolve a crisis that has stoked fears of a military conflict. Benchmark 10-year note yields were last at 1.746%, after earlier getting as low as 1.733%. They are down from 1.902% on Wednesday, which was the highest since Jan. 2020. Next week's Fed meeting is the major focus for the market. While the U.S. central bank is not expected to hike rates, it may indicate that a rate increase is likely in March. Investors are also looking for clues on whether the U.S. central bank will speed up the end of its bond purchase program, when it is likely to begin reducing the size of its massive balance sheet and whether it could raise rates by 50 basis points in March, rather than 25. The most important factor for markets will be "any guidance on the likely pace of tightening in the year/years ahead, via QT (quantitative tightening) as well as the funds rate," analaysts at TD Securities said in a report on Friday. That said, "we don’t expect a definitive message on either, unfortunately. The result could be mixed messages and/or overreaction in markets," TD said. Fed funds futures traders are fully pricing in a 25 basis point hike in March, but only a 5% chance of a 50 point hike that month, in addition to three more rate increases by year-end. ING's Garvey said demand in the Fed's reverse repurchase agreement facility shows that it may be easier for the Fed to reduce its balance sheet than take more aggressive action on rates. "There's clearly room for the Fed to take bigger action there, rather than going down the route, for example, of having a 50 basis point hike," Garvey said. Investors lent the Fed $1.71 trillion on Friday as demand for safe, short-dated assets continued to outstrip supply. The Fed's balance sheet stood at $8.79 trillion as of Jan. 12. It is up from $3.76 trillion in mid-2019. January 21 Friday 3:04PM New York / 2004 GMT Price Current Net Yield % Change (bps) Three-month bills 0.17 0.1724 -0.008 Six-month bills 0.3525 0.358 -0.003 Two-year note 99-136/256 0.9953 -0.056 Three-year note 99-146/256 1.2726 -0.069 Five-year note 98-154/256 1.5454 -0.073 Seven-year note 97-224/256 1.7012 -0.079 10-year note 96-172/256 1.7456 -0.088 20-year bond 97-244/256 2.1271 -0.077 30-year bond 95-216/256 2.0623 -0.079 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 17.75 0.00 spread U.S. 3-year dollar swap 15.25 0.50 spread U.S. 5-year dollar swap 8.50 0.50 spread U.S. 10-year dollar swap 6.00 1.00 spread U.S. 30-year dollar swap -18.00 0.50 spread (Reporting by Karen Brettell; Editing by David Gregorio)

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