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TREASURIES-U.S. prices fall ahead of debt supply this week

Gertrude Chavez-Dreyfuss

NEW YORK, Feb 4 (Reuters) - U.S. Treasury prices fell on Monday in generally light volume, after trading higher for most of last week, pressured by upcoming debt supply, as well as indications that inflation expectations are rising. U.S. data showing factory orders for November fell 0.6 percent, way below expectations, did push yields a little lower, but not enough to retrace their earlier rise. The market this week is bracing for $84 billion in refunding auctions for February that could cheapen rates going forward, analysts said. The U.S. Treasury will auction $38 billion in 3-year notes on Tuesday, $27 billion in 10-year notes on Wednesday, and $19 billion in 30-year bonds on Thursday. "These auctions are weighing on Treasuries right now," said Stan Shipley, fixed income strategist, at Evercore ISI in New York. "There's not going to be demand at 2.65 percent for the 10-year." Investors typically sell Treasuries ahead of an auction to push the yield higher so they can buy them at a lower price. Nomura Securities in a research note said there has been a clear upward trend in investment funds activity at the long-end auctions as the search for yield continues. Shipley also said there are indications that Monday's rise in yields was consistent with climbing inflation expectations that he believed was mostly due to higher oil prices. One indicator of inflation expectations is the U.S. dollar five-year forward inflation linked swap, currently at 2.26 percent, the highest in 1-1/2 months. At the beginning of the year, the U.S. 5-year swap rate was at a more than two-year low. In mid-morning trading, U.S. 10-year note yields rose to 2.73 percent, up from 2.691 percent late on Friday. U.S. 30-year bond yields, were also up at 3.071 percent , from 3.032 percent on Friday. On the short end of the curve, U.S. 2-year yields climbed as well to 2.53 percent, compared with Friday's 2.51 percent . Yields did tick lower after a 0.6 percent drop in U.S. factory orders in November. "This data - while several months behind us - further confirms that the slowing the U.S. economy in Q4 was more pronounced than appreciated in current pricing, or forecasts," said Jon Hill, interest rates strategist, at BMO Capital Markets in New York.

February 4 Monday 11:00AM New York / 1600 GMT Price

Price Current NetYield % Change

(bps)

Three-month bills 2.35 2.3961 0.000Six-month bills 2.4 2.4624 -0.003Two-year note 99-243/256 2.5263 0.016Three-year note 99-240/256 2.5219 0.025Five-year note 99-208/256 2.5402 0.032Seven-year note 100 2.625 0.03710-year note 103-92/256 2.7307 0.04030-year bond 105-232/256 3.0707 0.039

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 14.75 0.50

spread

U.S. 3-year dollar swap 11.00 0.50

spread

U.S. 5-year dollar swap 8.50 0.00

spread

U.S. 10-year dollar swap 2.50 0.00

spread

U.S. 30-year dollar swap -19.50 -0.25

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio)