TREASURIES-Yields steady, Treasury to sell 10-year TIPS

By Karen Brettell NEW YORK, Jan 20 (Reuters) - U.S. Treasury yields were steady on Thursday, after dropping from two-year highs on Wednesday, following a rapid sell-off sparked by anticipation of a more hawkish Federal Reserve drew new buying interest. Yields have jumped this month as investors adjust to the likelihood that the Fed will tighten monetary policy more aggressively to stave off unabated inflation. However, “the market got a bit oversold,” said Tom di Galoma, managing director at Seaport Global Holdings in New York. Investors are fully pricing in an interest rate hike at the Fed’s March meeting, and three more hikes this year. The Fed's January meeting next week will also be scrutinized for any clues on whether the U.S. central bank will speed up the end of its bond purchase program, and when it is likely to begin reducing the size of its massive balance sheet. Benchmark 10-year note yields were last at 1.825%, after reaching 1.902% in overnight trading on Wednesday, which was the highest since January 2020. The yields could drop to the 1.70% to 1.75% area, though they are likely to resume their increase as Fed rate hikes come into view, di Galoma said, adding that “I think the big institutional accounts are looking to sell rallies rather than buy the dip.” Real yields, which adjust for expected inflation, have led much of the move higher in yields, though they remain deeply negative, meaning that inflation is expected to exceed the yields on the bonds. Demand for the inflation-linked debt will be tested when the Treasury sells $16 billion in 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. Yields on five-year TIPS, or real yields, were last at minus 1.11%, and are up from minus 1.98% in November. Yields on 10-year TIPS are at minus 0.64%. Thirty-year TIPS yields are close to turning positive, however, and are currently trading at minus 0.05%. Data on Thursday showed that the number of Americans filing new claims for unemployment benefits unexpectedly rose last week, likely as a winter wave of coronavirus infections disrupted business activity, which could constrain job growth this month. Rising geopolitical uncertainty may also increase demand for safe-haven U.S. bonds. U.S. Secretary of State Antony Blinken met European allies in Berlin on Thursday, seeking to present a united front ahead of last-ditch crisis talks with Moscow aimed at preventing Russia from attacking Ukraine. January 20 Thursday 9:38AM New York / 1438 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1725 0.175 0.003 Six-month bills 0.35 0.3555 -0.007 Two-year note 99-114/256 1.0392 0.014 Three-year note 99-102/256 1.3313 0.013 Five-year note 98-78/256 1.6082 -0.003 Seven-year note 97-104/256 1.7737 -0.008 10-year note 95-248/256 1.8254 -0.002 20-year bond 96-188/256 2.2042 0.005 30-year bond 94-16/256 2.1456 0.007 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 17.25 -0.50 spread U.S. 3-year dollar swap 14.25 -0.75 spread U.S. 5-year dollar swap 8.00 -0.25 spread U.S. 10-year dollar swap 5.00 0.00 spread U.S. 30-year dollar swap -20.00 -0.50 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)