Yield curves flatten ahead of jobs report



CHICAGO, Dec 2 (Reuters) - U.S. Treasury yield curves flattened on Thursday as investors wagered that early rate hikes would curb future inflation, while the market focused on the Omicron COVID-19 variant and the upcoming November employment report.

The benchmark 10-year yield US10YT=RR fell as low as 1.409% and was last down less than a basis point at 1.4274%.

The 30-year yield US30YT=RR tumbled to its lowest level since January at 1.737%. It was last 3.2 basis points lower at 1.7459%.

The two-year yield US2YT=RR rose as high as 0.613% and was last up 3.8 basis points at 0.6008%.

Assuming that higher rates next year will ultimately translate to lower inflation and a lower peak in interest rates later on, traders have squeezed the gap between two-year and 10-year note yields US2US10=TWEB to the narrowest in eleven months.

The five-year note and 30-year bond US5US30=TWEB yield curve also flattened. The gap between the two was last about 4 basis points narrower at 56.50 basis points.

Tony Rodriguez, head of fixed income strategy at Nuveen, said that the market is pricing in a more-aggressive U.S. Federal Reserve to deal with rising inflation.

"That seems to be the narrative that explains the rise in the front end, the flattening of the curve, and the back end behaving as if to say 'ok we're not going to have to deal with very high inflationary pressures for a long time,'" he said.

He added that the long end of the market was "also benefiting from the current flight to quality, risk aversion from the uncertainty of Omicron."

News of the first U.S. case of the variant came out on Wednesday.

Meanwhile, the market was awaiting Friday's release of the U.S. government's employment report. According to a Reuters survey of economists, nonfarm payrolls probably increased by 550,000 jobs in November after rising 531,000 in October. The unemployment rate is forecast dipping to 4.5% from 4.6% in October.

Ahead of the data, the ADP National Employment Report on Wednesday showed private payrolls increased by 534,000 last month, while the Labor Department reported on Thursday that initial claims for state unemployment benefits rose 28,000 to a seasonally adjusted 222,000 for the week ended Nov. 27.

"With the ADP number, the claims number, the employment story seems to be intact and pretty solid, so (the jobs report) would have to be something that either is aggressively stronger or weaker to derail that narrative," Rodriguez said.

Real yields rose, with the five-year Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR rising as high as -1.494% and the 10-year TIPS climbing to -0.973%. US10YTIP=RR December 2 Thursday 10:46AM New York / 1546 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.0525

0.0532

-0.003 Six-month bills US6MT=RR

0.09

0.0913

-0.013 Two-year note US2YT=RR

99-205/256 0.6008

0.038 Three-year note US3YT=RR

99-160/256 0.879

0.043 Five-year note US5YT=RR

100-84/256 1.1821

0.027 Seven-year note US7YT=RR

100-226/256 1.3672

0.013 10-year note US10YT=RR

99-132/256 1.4274

-0.007 20-year bond US20YT=RR

102-200/256 1.8329

-0.018 30-year bond US30YT=RR

103

1.7459

-0.032

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

22.50

-1.00

spread

U.S. 3-year dollar swap

21.25

-1.50

spread

U.S. 5-year dollar swap

10.50

-0.75

spread

U.S. 10-year dollar swap

6.75

-0.25

spread

U.S. 30-year dollar swap

-15.75

0.25

spread


Reporting by Karen Pierog, Tom Westbrook and Yoruk Bahceli; Editing by Devika Syamnath and Angus MacSwan

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