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TREASURIES-U.S. yields rise, traders bet on Fed’s fast balance sheet reduction

April 6, 2022By Reuters

Adds latest prices, comments by Fed’s Daly

By Rodrigo Campos

U.S. Treasury yields rose to multi-year highs on Tuesday as traders focused on the Federal Reserve’s plan for unwinding its balance sheet, with longer-term yields moving more quickly and partly reversing some of the recent inversions in the U.S. curve.

Yields took off after Fed Governor Lael Brainard said she expects rapid reductions to the Fed’s balance sheet alongside increases to the benchmark interest rate. nS0N2VH027

She said the Fed will raise rates “methodically” and as soon as next month will begin to ramp up reductions to its nearly $9 trillion balance sheet at a “considerably” faster pace than the last time the Fed shrank its holdings.

The Fed’s recent move to raise rates typically affects the short end of the curve the most, while selling duration held in the U.S. central bank’s balance sheet pressures yields higher on the long-end.

“The market right now is focused on the Fed’s intentions for its balance sheet, which has led to the yield curve reversing some of the inversions that we saw last week,” said Jim Barnes, director of fixed income at Bryn Mawr Trust.

San Francisco Fed President Mary Daly separately pointed to the next meeting, scheduled for May 3-4, as a possible start to the balance sheet reduction. nS0N2UR061

The Fed is due to release on Wednesday minutes of its March meeting that are expected to provide fresh details on the pace and scope of plans to reduce its bond holdings.

The yield on 10-year Treasury notes US10YT=RR was up 13.1 basis points to 2.543% while the 2-year note yield US2YT=RR was up 7.2 basis points at 2.500%, leaving the 2-10 spread at 3.97 basis points after having been negative for the most part since last week.

The 2-year yield hit its highest level since March 2019 and the 5-year yield touched highs not seen since December 2018. The 10-year yield rose to 2.567%, its highest level since May 2019.

The yield on the 30-year Treasury bond US30YT=RR was up 10.4 basis points to 2.578%. Late last month it hit 2.645%, its highest level since July 2019.

The breakeven rate on 5-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 3.26%, after closing at 3.228% on Monday.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.85% and the U.S. dollar 5-years forward inflation-linked swap USIL5YF5Y=R, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.599%.

(Reporting by Rodrigo Campos; Additional reporting by Karen Brettell; Editing by Andrea Ricci, Will Dunham and Leslie Adler)

((; @RodrigoCampos;))

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