TREASURIES-US yield curve steepens as traders focus on Fed balance sheet

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NEW YORK, April 8 (Reuters) – The U.S. Treasury’s 10-year yield hit a three-year high above 2.7% on Friday and the two-year/10-year spread remained close to its widest this week, with traders betting on a more hawkish stance from the Federal Reserve.

The 10-year yield hit 2.73%, its highest level since March 2019, and the yield on 10-year inflation protection securities was within 15 basis points of turning positive for the first time in more than two years.

The sharp rise in yields this week began on Tuesday after comments from dovish Fed Governor Lael Brainard shifted the focus from rate hikes to Fed balance sheet runoff.

“Right now, the biggest theme is momentum. Trading, where yields are rising,” said Guy LeBas, chief fixed income strategist at Janney in Philadelphia.

He said the recent rise in yields “reflects the perception that the Fed is ready to do more than is necessary to reduce inflation, but also perhaps what is necessary to slow economic growth.”

Some technical indicators are showing yields at an inflection point, which means they might struggle to move much higher. But if they did, there would be little technical resistance to take another step forward.

Yields on 2-, 5-, and 10-year Treasuries hit multi-year highs this week, and the 2/10 yield spread turned positive after reversing late last week.

Fed officials agreed at their March meeting to cut up to $95 billion per month from central bank assets as another inflation-fighting tool, including up to $35 billion in mortgage-backed securities.

The yield on 10-year Treasury bills rose 4.8 basis points to 2.702%, while the yield on 2-year notes rose 3.7 basis points to 2.499%, leaving the spread 2/ 10 to 19.89 basis points.

The nearly 27 basis point widening in that spread so far this week is the highest in any week since June 2013, and follows last week’s 27.5 basis point tightening which reversed the curve, the sharpest weekly tightening since September 2011.

The yield on 30-year Treasury bills rose 3.6 basis points to 2.725%, after touching 2.73%, its highest since May 2019.

The break-even rate for five-year US Treasury inflation-protected securities (TIPS) last stood at 3.273%, after closing at 3.232% on Thursday.

The 10-year TIPS break-even rate was last at 2.864% and the 5-year US dollar inflation-linked swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed quantitative easing was last at 2.637. %.

Reporting by Rodrigo Campos; edited by John Stonestreet

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