Yields pulled lower as risk appetite wanes



By Karen Pierog

May 4 (Reuters) - A safe-haven bid helped push U.S. Treasury yields lower on Tuesday, while U.S. Treasury Secretary Janet Yellen warned that rates may need to rise to keep the economy from running too hot.

The benchmark 10-year yield US10YT=RR was last down 1 basis points at 1.5959%, holding below a 14-month high of 1.776% reached on March 30.

Yields slid amid a stock selloff with the Nasdaq down more than 2%.

Later in the session, longer-dated yields ticked higher after the release of remarks by Yellen, who said interest rates may need "to rise somewhat" to prevent the economy from overheating.

George Goncalves, head of U.S. Macro Strategy at MUFG in New York, said while the drop in equities was probably a catalyst for Tuesday's lower yields, there was also some skepticism creeping into the bond market.

"I think there's a mood starting to form that perhaps economic data will not be as robust as many were anticipating," Goncalves said.

Data on Monday that showed U.S. manufacturing activity growth slowed in April amid supply chain challenges and increased demand sent yields tumbling.

Goncalves said the upcoming April employment report could shake up the current "holding pattern" in the Treasury market.

"To get this market back on track to higher yields, it needs to be a blockbuster (non-farm payrolls) number on Friday," Goncalves said.

Meanwhile, the market was bracing for more supply.

The U.S. Treasury said on Monday it plans to borrow $463 billion in the second quarter, assuming an end-of-June cash balance of $800 billion, as spending increases in response to the pandemic. That was much bigger than its February estimate of $95 billion, which preceded the March enactment of the $1.9 trillion American Rescue Plan.

On Wednesday, second-quarter refunding details, including anticipated auction sizes for each maturity of notes and bonds, will be announced.

"There's a chance that there's a resumption of those concerns around heavy supply and the market's ability to digest that," said Bill Merz, chief fixed income strategist at U.S. Bank Wealth Management.

The two-year Treasury yield US2YT=RR , which typically moves in step with interest rate expectations, was last less than a basis point higher at 0.1624%.

A closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes US2US10=RR was last less than a basis point flatter at 143 basis points.

The yield on 10-year Treasury Inflation-Protected Securities US10YTIP=RR fell to its lowest level since February at -0.868%. It was last at -0.828%.

The effective fed funds rate USONFFE= rose to 0.06% as of Monday, after falling to 0.05% on April 30, its lowest level since June 2020. The overnight repo rate USONRP= , which measures short-term borrowing costs, fell to 0.02% on Tuesday from 0.03% on Monday.

May 4 Tuesday 3:44PM New York / 1944 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.02

0.0203

0.002 Six-month bills US6MT=RR

0.04

0.0406

0.003 Two-year note US2YT=RR

99-237/256 0.1624

0.002 Three-year note US3YT=RR

100-40/256 0.3216

0.000 Five-year note US5YT=RR

99-166/256 0.8221

-0.008 Seven-year note US7YT=RR

99-212/256 1.2758

-0.012 10-year note US10YT=RR

95-192/256 1.5959

-0.010 20-year bond US20YT=RR

95-132/256 2.1545

-0.016 30-year bond US30YT=RR

91-140/256 2.2668

-0.022

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

11.25

-0.25

spread

U.S. 3-year dollar swap

14.00

0.00

spread

U.S. 5-year dollar swap

9.50

0.00

spread

U.S. 10-year dollar swap

-1.00

-0.50

spread

U.S. 30-year dollar swap

-26.50

-0.50

spread


By Karen Pierog; Editing by Nick Macfie and Will Dunham

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