CASH – US 2-year yield skyrockets to 19-month high, curve flattens across the board

    * U.S. 5/30 yield curve flattest since March 2020
    * U.S. 2/10 yield spread narrowest since August
    * U.S. 30-year yield falls to five-week low
    * U.S. 10-year yield slides to two-week trough
    * U.S. 5-year note auction shows strong demand

 (Adds 5-year note auction results, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Oct 27 (Reuters) - U.S. 2-year Treasury yields
rose to fresh 19-month highs on Wednesday, flattening the yield
curve, as the possible timing of the Federal Reserve's first
interest rate rise came into tighter focus.
    A strong U.S. 5-year note auction added to overall bids in
the Treasury market, pushing longer-dated yields lower. The note
at the auction picked up a high yield of 1.157%, lower than the
expected rate at the bid deadline, suggesting investors were
seeking a lower premium for the 5-year note.
    The bid-to-cover ratio was 2.55, compared with an average of
2.37 over the last several auctions.
    In the run-up to the Fed's policy meeting next week, market
focus has moved beyond pricing the central bank's likely taper
of asset purchases and onto the timing of the first rate rise
since December 2018.
    Rising oil prices and inflation expectations have fed
into that pricing, even though Fed Chair Jerome Powell said last
week it wasn't time to raise rates just yet. 
    Bank of England Governor Andrew Bailey, on the other hand,
signalled last week that the BoE would act to curb inflation
expectations. Futures markets now fully price in a 15 basis
point BoE rate hike on Nov. 4 and another 25 basis point move in
    "The BoE has people questioning if the Fed can really hold
off that long especially with the inflation backdrop that we
have and the continued supply chain pressures," said Zachary
Griffith, macro strategist at Wells Fargo.
    "I think that's what making people re-assess what's
realistic and how committed the Fed can be to its average
inflation targeting that is kind of untested," he added.
    The Fed is widely expected to begin tapering its $120
billion in monthly purchases of Treasury bonds and
mortgage-backed securities next month, but Fed funds futures
 already priced a 70% chance of a June rate hike on
    U.S. 2-year yields spiked to 0.511%, the highest
since March 2020, and were last at 0.4911%.
    The 5-year yield -- another segment of the curve that's also
sensitive to interest rate expectations -- was last down 4 basis
points at 1.1450%. It hit 1.2520% on Monday, the
highest since February 2020.
    U.S. 10-year yields dropped to a two-week low of
1.527% and were last at 1.5361%. That, in turn, narrowed the
spread between the 2- and 10-year yields to 103 basis points,
the flattest since late August.
    The 30-year slid to a five-week trough of 1.9486%
. It was last down 10 basis points at 1.9507%.
    The spread between U.S. 5-year notes and 30-year bonds
narrowed to as low as 77.8 basis points, the
tightest gap since March 2020.
   The U.S. 5-year inflation breakeven rate, meanwhile, which
reflects market-based inflation expectations over the next five
years, hit north of 3%,, the highest since at least
January 2004.
    Ten-year breakevens were at the highest since May 2006
      October 27 Wednesday 1:33PM New York / 1733 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.055        0.0558    0.000
 Six-month bills               0.0625       0.0634    0.000
 Two-year note                 99-198/256   0.4891    0.005
 Three-year note               99-150/256   0.7665    0.002
 Five-year note                98-180/256   1.1467    -0.034
 Seven-year note               99-4/256     1.3996    -0.059
 10-year note                  97-104/256   1.5361    -0.082
 20-year bond                  97           1.933     -0.098
 30-year bond                  101-28/256   1.9507    -0.100
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        15.75        -1.50    
 U.S. 3-year dollar swap        16.25         0.50    
 U.S. 5-year dollar swap         8.00        -0.75    
 U.S. 10-year dollar swap        1.75        -1.25    
 U.S. 30-year dollar swap      -20.50        -1.25    
 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Sujaya Rao in London, Tom Westbrook and Vidya Ranganathan in
Singapore; Editing by Kirsten Donovan)

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