Bears bail out as 10-year Treasuries eye best week in a year

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BOSTON / SINGAPORE — Benchmark 10-year

U.S. Treasury yields were close to their biggest weekly decline

in a year on Friday as the market deemed a spike in inflation to

be transitory, squeezing bears out of short positions.

The 10-year yield, which falls when prices rise,

was nearly unchanged at 1.4603% on Friday afternoon after

touching as low as 1.428% earlier in the session, its lowest

since early March. At that point, the yield had fallen roughly

13 basis points for the week, the steepest weekly drop since

last June.

Traders said short-covering was driving the bond rally, in a

market that remains the recipient of enormous Federal Reserve

support, after U.S. inflation data on Thursday was dismissed as

insufficiently scary to prompt early tapering of

stimulus.

TD Securities global head of rates strategy Priya Misra said

the pattern was triggered once the benchmark yield fell below

1.5%, the low end of its range in recent weeks, on June 9. That

would have prompted an exit from many “steepener” trades and

meant investors were buying longer-term debt since then, she

said.

“I see this more as flow-driven trading rather than

fundamentals,” she said of Friday’s patterns.

Kim Rupert, senior economist for Action Economics, said the

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move back up in yields on Friday also reflected investment

strategies as traders positioned ahead of comments due from

U.S. Federal Reserve officials next week.

“Today was just a little unwinding, people taking chips off

the table,” she said.

The Fed accepted all $547.8 billion in bids submitted into

its reverse repurchase facility on Friday, a fifth consecutive

record amount.

Money fund managers have embraced the facility as a place to

park cash, putting pressure on short-term interest rates. The

one-month Treasury bill was at 0.0076%, just above

the 0% level it last touched on May 28.

A reopening U.S. economy meant year-on-year consumer prices

did rise 5%, the biggest jump in nearly 13 years, data on

Thursday showed. But big contributions from price rises for

airline tickets and used cars were seen as unsustainable and in

keeping with the Fed’s forecasts for a temporary spike.

Short positions in Treasuries had hit their highest since

2018, according to JP Morgan positioning data last week.

Their unwinding has flattened the yield curve to push the

gap between policy-sensitive 2-year notes and 10-year notes

as low as 128 basis points early in Friday’s

trading, its narrowest in three months. It was last at 131 basis

points, two basis points higher than Thursday’s close.

The gap between 5-year notes and 30-year bonds

was at 140 basis points, about a basis point lower than

Thursday’s close.

At the long end of the curve, the 30-year yield

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was at 2.1462% and touched as low as 2.122%, the lowest since

late February.

June 11 Friday 2:16 PM New York / 1816 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 0.0275 0.0279 0.003

Six-month bills 0.0375 0.038 -0.003

Two-year note 99-243/256 0.1509 0.000

Three-year note 99-210/256 0.3102 0.008

Five-year note 100-6/256 0.7452 0.013

Seven-year note 100-168/256 1.1516 0.010

10-year note 101-132/256 1.4603 0.001

20-year bond 102-236/256 2.0702 -0.004

30-year bond 105-8/256 2.1462 -0.008

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 7.25 0.50

spread

U.S. 3-year dollar swap 9.75 0.75

spread

U.S. 5-year dollar swap 7.25 0.25

spread

U.S. 10-year dollar swap -2.75 0.00

spread

U.S. 30-year dollar swap -30.75 -0.50

spread

(Reporting by Ross Kerber in Boston and by Tom Westbrook in

Singapore; Editing by Ana Nicolaci da Costa and Nick Zieminski)