Risk-on sentiment, Fed taper talk lift yields



By Karen Pierog

CHICAGO, Dec 2 (Reuters) - U.S. Treasury yields rose on Thursday as investors returned to riskier assets and Federal Reserve officials talked up a quicker end to the central bank's bond purchases.

The benchmark 10-year yield US10YT=RR , which had fallen to a session low of 1.409%, was last less than a basis point higher at 1.4375%. Yields move inversely to prices.

The 30-year yield US30YT=RR was last 2.8 basis points lower at 1.7499%. Earlier in the session, it tumbled to its lowest level since January at 1.737%, benefiting from flight-to-quality trade sparked by concerns about the impact of the COVID-19 Omicron variant.

The two-year yield US2YT=RR rose to a one-week high of 0.63%. It was last up 5.8 basis points at 0.6206%.

Jim Vogel, interest rate strategist at FHN Financial in Memphis, Tennessee, pointed to the rally on Wall Street, where the S&P 500 rose about 1.4%.

"You've got a little bit of a movement back into risk assets, but more importantly you have Fed speakers on the tape reinforcing the faster taper message," he said.

"Everyone in the market is reading tea leaves that a faster taper improves the odds, if not guarantees the odds, that we're going to see a first-half hike based on what we know now," Vogel added.

Federal Reserve Bank of Atlanta President Raphael Bostic told the Reuters Next conference on Thursday it would be appropriate to conclude the tapering of the central bank's bond-buying program by the end of March.

He also said if inflation continues to run as high as 4% through next year, that would present a good case for pulling forward interest rate hikes.

At another event, San Francisco Fed President Mary Daly said it might be time to start crafting a plan for raising interest rates to address above-target inflation.

A rates outlook released by BofA Global Research on Thursday pegged the 10-year yield at 1.75% in 2022's first quarter, rising to 2% in the fourth quarter.

Investors also returned to risky U.S. corporate junk bonds, which on Tuesday ended their worst month since the onset of the pandemic.

The iShares iBoxx High-Yield Corporate Bond exchange-traded fund HYG.P clawed back some losses from Wednesday's fall to $85.32, its lowest level since November 2020. It closed Thursday up about 0.7% at $86.

Meanwhile, some Treasury bills due this month were trading at elevated yields on fears the U.S. government could run out of money in as soon as two weeks.

On Friday, all eyes will be on the U.S. government's employment report. According to a Reuters survey of economists, non-farm 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," said Tony Rodriguez, head of fixed income strategy at Nuveen.

Yield curves flattened with the closely watched gap between two-year and 10-year note yields US2US10=TWEB at its narrowest in 11 months. It was last down 2.8 basis points at 82.10 basis points.

The five-year note and 30-year bond US5US30=TWEB yield curve was last 5.5 basis points flatter at 54.80 basis points.

The U.S. Treasury on Thursday announced auctions next week for $54 billion of three-year notes, $36 billion of 10-year notes, and $22 billion of 30-year bonds.

December 2 Thursday 4:09PM New York / 2109 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.0525

0.0532

-0.003 Six-month bills US6MT=RR

0.0925

0.0938

-0.010 Two-year note US2YT=RR

99-195/256 0.6206

0.058 Three-year note US3YT=RR

99-148/256 0.8952

0.059 Five-year note US5YT=RR

100-60/256 1.2015

0.047 Seven-year note US7YT=RR

100-204/256 1.38

0.026 10-year note US10YT=RR

99-108/256 1.4375

0.003 20-year bond US20YT=RR

102-184/256 1.8366

-0.014 30-year bond US30YT=RR

102-232/256 1.7499

-0.028

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

21.75

-1.00

spread

U.S. 5-year dollar swap

10.50

-0.75

spread

U.S. 10-year dollar swap

7.00

0.00

spread

U.S. 30-year dollar swap

-15.50

0.50

spread


Reporting by Karen Pierog, Tom Westbrook and Yoruk Bahceli; Editing by Devika Syamnath, Angus MacSwan, Susan Fenton, Dan Grebler and Richard Chang

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