Long-term returns tumble on COVID fears; Two-year yields jump on hawkish Clarida

NEW YORK, Nov. 19 (Reuters) – Long-term US Treasury yields fell on Friday as concerns over new lockdowns linked to the spread of COVID-19 in Europe increased demand for safe-haven bonds, although this decision was probably overstated by the low liquidity.

Two-year yields have jumped, meanwhile, after Federal Reserve Vice Chairman Richard Clarida took a hawkish tone in a speech and admitted there is an upside risk to inflation .

Germany’s health minister said a lockdown including people who had been vaccinated could not be ruled out. Austria has said it will re-impose a full lockdown next week and demand that its entire population be vaccinated from February. Read more

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The European response has raised fears that further lockdowns could also occur in the United States if there is a dramatic increase in cases, which would hurt the economy.

“Even though Europe has been more aggressive than the United States in terms of the government’s tough responses to COVID, there are still discussions about how we might see the same sort of thing happen here if cases were to. increase significantly, “said Tom Simons, money market economist at Jefferies in New York, although he added that” I don’t think these fears are necessarily justified. “

The scale of the backlash, which lowered 10-year yields by as much as nine basis points, also indicates a deterioration in market liquidity which analysts say is in part due to hedge funds burned by the volatile movements of October and November withdrew from the market. Read more

“The hedge fund community is not there the same way it normally is and that could create a bit more of an illiquid market and a bit more rate movement than we would normally see otherwise,” said Simons.

Benchmark 10-year bonds fell 1.538% for the last time, down five basis points on the day, after falling as low as 1.515%. the lowest since November 10.

Many investors were caught in default in October as a rapid rise in inflation led traders to re-price the possibility that the Fed would have to hike rates as early as mid-2022 to stem price pressures.

Two-year yields also surged on Friday after Clarida said it “may very well be appropriate” to discuss the acceleration of the Fed’s liquidation of asset purchases at its next meeting in December. Read more

Traders are now banking on a 67% probability of a rate hike in June 2022, up from 54% earlier on Friday, according to the CME group’s FedWatch tool.

Two-year yields were last at 0.505%, after falling to 0.446% earlier today.

Fed Governor Christopher Waller also said on Friday that the US central bank should stand ready to step up the pace of its reduction in bond purchases and raise interest rates from their near zero level earlier. than currently hoped due to persistently high inflation and strong employment. wins. Read more

Liquidity is expected to drop further next week before the market closes Thursday for Thanksgiving, which could lead to even more choppy market moves.

The Treasury will sell $ 176 billion in new coupon deals next week, including $ 58 billion in two-year notes and $ 59 billion in five-year notes on Monday, as well as $ 59 billion in seven-year notes Tuesday.

November 19 Friday 3:00 p.m. New York / 2000 GMT

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Additional reporting by Yoruk Bahceli in London; Editing by Cynthia Osterman

Our Standards: Thomson Reuters Trust Principles.

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