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Yields rise after seven-year auction ahead of Fed statement

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NEW YORK — U.S. Treasury yields rose on

Tuesday despite the Treasury Department seeing improved demand

for a $62 billion sale of seven-year notes, while inflation

expectations hit eight-year highs before the Federal Reserve

will on Wednesday conclude its two-day meeting.

Nerves had increased over the seven-year auction after the

maturity drew weak demand at auctions in February and March.

“The seven-year auction was widely anticipated just because

of the bad previous two auctions, so it was nice to see it make

somewhat of a comeback,” said Eric Souza, senior portfolio

manager at SVB Asset Management.

The notes sold at a high yield of 1.306%, close to where

they had traded before the auction. Yields increased in the

leadup to the sale, which may have improved demand. Dealers took

a below average share of 22.33% of the debt, indicating solid

investor interest.

On Monday, there was solid demand for $60 billion sale of

two-year notes and $61 billion in five-year notes.

Yields initially dipped on the auction results, before

continuing to march higher. Seven-year yields gained

five basis points to 1.308%, the highest since April 15.

Benchmark 10-year note yields rose six basis

points to 1.627%, the highest since April 20. They have dropped


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from a more than one-year high of 1.776% last month.

Inflation expectations also jumped as investors bet that

increased government spending and loose monetary policy will

increase price pressures.

Breakeven rates on 10-year Treasury Inflation-Protected

Securities (TIPS), a measure of expected annual

inflation for the coming decade, rose to 2.41%, the highest

since 2013.

The Fed is expected to acknowledge economic improvement when

it concludes its meeting on Wednesday and investors will watch

for indications of when it may begin to taper its bond


“My base expectation is we start seeing the Fed take some

baby steps towards preparing the markets for some kind of

potential announcement on tapering in the middle of the year,”

said Subadra Rajappa, head of U.S. rates strategy at Societe

Generale in New York.

U.S. Gross Domestic Product data due on Thursday is expected

to show strong first-quarter growth as the economy recovered

from COVID-19 related shutdowns.

But the Fed faces a challenge in preparing the market for a

reduction in bond purchases without sparking a “taper tantrum,”

which could send yields spiraling higher and potentially derail

economic progress.

“You definitely don’t want a taper tantrum,” said Souza. “If

they are thinking of tapering by the end of the year, you need

to start having some sort of hints to the market.”

Market participants will also watch to see if the U.S.

central bank raises the interest it pays on excess reserves


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(IOER) and overnight reverse repurchase agreements as borrowing

rates in repo intermittently trade negative and short-term bill

yields approach zero.

Overnight repo rates were at one basis point on

Tuesday. They traded as low as minus six basis points last


One-month Treasury bill yields were also one

basis point, after jumping as high as four basis points on


The federal funds rate has stayed relatively

steady at seven basis points. Analysts expect the Fed will hike

the IOER if the fed funds rate falls below five basis points.

April 27 Tuesday 4:14PM New York / 2014 GMT

Price Current Net

Yield % Change


Three-month bills 0.015 0.0152 -0.008

Six-month bills 0.035 0.0355 -0.002

Two-year note 99-227/256 0.1818 0.003

Three-year note 100-12/256 0.3591 0.010

Five-year note 99-88/256 0.8845 0.034

Seven-year note 99-158/256 1.308 0.046

10-year note 95-120/256 1.627 0.057

20-year bond 95-20/256 2.1824 0.054

30-year bond 90-228/256 2.2989 0.055


Last (bps) Net



U.S. 2-year dollar swap 10.50 -0.50


U.S. 3-year dollar swap 13.00 0.25


U.S. 5-year dollar swap 7.50 -1.75


U.S. 10-year dollar swap -1.25 -0.25


U.S. 30-year dollar swap -27.50 -0.25


(Editing by Kirsten Donovan; Editing by David Gregorio and Will



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