TREASURIES-Long-dated yields tumble, curve flattens after Fed

       By Karen Brettell
    NEW YORK, June 17 (Reuters) - Long-dated yields tumbled on
Thursday and the yield curve flattened as some investors
appeared to have been caught flat-footed by the U.S. Federal
Reserve's comments that it is in no hurry to pare bond purchases
and expects to raise rates in 2023.
    Yields initially spiked after the Fed said on Wednesday that
policymakers expect to increase rates two times in 2023.
Two-year and five-year notes, which are the most sensitive to
interest changes, saw the largest yield increases.
    But long-dated yields dropped on Thursday and the yield
curve flattened sharply in what appeared to be repositioning
from the Fed statement, with people that had been betting on
yield curve steepening scrambling to cover those trades.
    "There were probably several bets that the Fed was going to
taper, or at least talk about tapering, and they really didn't
mention it at all, and so I think whoever decided to put a big
steepening exposure on is getting stopped out," said Tom di
Galoma, a managing director at Seaport Global Holdings in New
York.
    The biggest move was in the yield curve between five-year
notes and 30-year bonds, which flattened as much
as 117 basis points, the smallest yield gap since November. The
curve has flattened from 140 basis points before the Fed
statement.
    Fed Chair Jerome Powell said there had been initial
discussions about when to pull back, a conversation that would
be completed in coming months as the economy continues to heal.

    Many analysts think the Fed will announce plans to taper at
its Jackson Hole, Wyoming, economic symposium in August, with
bond reductions unlikely to occur until late this year or early
next year.
    Fed funds futures traders are pricing in a hike in January
2023.
    Some analysts said expectations of hikes sooner could also
be denting the inflation outlook.
    "The market was definitely caught a little bit surprised by
two hikes in 2023 ... that takes away from inflation pressures,"
said Justin Lederer, an interest rate strategist at Cantor
Fitzgerald in New York.
    Benchmark 10-year yields were last 1.511%, after
reaching 1.594% on Wednesday.
    Five-year yields were 0.881%, after rising to a
two-month high of 0.913% on Wednesday. Two-year yields
 reached a one-year high of 0.217% on Thursday, and
were last 0.215%.
    The Treasury saw strong demand for a $16 billion sale of
five-year Treasury Inflation-Protected Securities (TIPS), which
was likely helped by a sharp sell-off going into the auction.

    Breakeven rates on the debt, which measure
expected annual inflation for the next five years, dropped to
2.30% before the auction, from 2.40% earlier, and rose back to
2.39% in afternoon trading.
    The cost of borrowing Treasuries in the overnight repurchase
agreement market (repo) rose after the Fed on Wednesday raised
the interest rate it pays banks on reserves by five basis points
to 0.15%, and the rate it pays on overnight reverse repurchase
agreements to 0.05% from zero.
    The move will give some relief to money fund investors who
are struggling to find high quality, short-term assets and have
faced paltry returns with yields nearing zero. The Fed's reverse
repo operation saw a record $756 billion in demand on Thursday.

    Overnight repo rates increased to six basis
points, from one basis point before the Fed move.
    Yields on one-month Treasury bills increased to
four basis points, from one basis point.
    Market gauges for liquidity such as the U.S. swap and cash
market spreads remained quiet on Thursday.

      June 17 Thursday 3:07PM New York / 1907 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0375       0.038     -0.010
 Six-month bills               0.05         0.0507    -0.007
 Two-year note                 99-211/256   0.2154    0.010
 Three-year note               99-118/256   0.4316    0.024
 Five-year note                99-94/256    0.8809    -0.001
 Seven-year note               99-244/256   1.257     -0.031
 10-year note                  101-12/256   1.5108    -0.058
 20-year bond                  103-88/256   2.0446    -0.098
 30-year bond                  106-16/256   2.1009    -0.108

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         7.25         0.25
 spread
 U.S. 3-year dollar swap         9.25         0.50
 spread
 U.S. 5-year dollar swap         6.25        -0.50
 spread
 U.S. 10-year dollar swap       -3.25        -0.50
 spread
 U.S. 30-year dollar swap      -29.50         1.50
 spread



 (Reporting by Karen Brettell; additional reporting by Saikat
Chatterjee in London; editing by Jonathan Oatis)

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