TREASURIES-U.S. yields climb as investors see strong economy, more supply

U.S. 10-year, 30-yields hit more than 1-year high * U.S. yield curve steepest since Sept. 2015 * U.S. overnight repo rate turns negative * Concerns about bank leverage rule persist * U.S. PPI rises in February, lifts yields (New throughout, updates prices, yields, market activity and comments, adds bank leverage rule) By Gertrude Chavez-Dreyfuss NEW YORK March 12 (Reuters) – U.S. Treasury prices plunged on Friday, pushing yields on benchmark 10-year notes to their highest in more than a year, on continued optimism about U.S. economic prospects and expectations for increased debt supply with the approval of the $1.9 trillion coronavirus stimulus package. The U.S. yield curve, a barometer of risk sentiment, also steepened sharply, with the spread between 2-year and 10-year notes at 148.34 basis points, its widest level since September 2015. Investors also worried about a looming change in regulation on the so-called “supplementary leverage ratio” (SLR) that could prompt big Wall Street banks to reduce securities holdings and lending, analysts said. The SLR directs larger banks to hold more capital against their assets. Last April, the Federal Reserve eased leverage rules for large banks by exempting certain investments – in this case holdings of Treasuries or deposits at the Fed – from a key leverage calculation. The central bank was trying to fight the economic slowdown caused by the pandemic. That exemption is set to expire at the end of the month. So far there has been no word from the Fed on a possible extension. “The bias in rates is still higher barring an unforeseen setback on the vaccines or explicit Fed action which appears low based on Powell’s (comments) on March 4,” said Gregory Faranello, head of U.S. rates at Amerivet Securities in New York. He added that the outcome of the SLR decision is one of the overriding factors in the market right now. If that exemption is not extended, that could prompt the big banks to sell Treasuries and cause a further spike in yields. U.S. 10-year yields, which started rising in Asia, rose as high as 1.642%, a more than one-year peak. It was last up at 1.619%. The 10-year yield on Friday was on a seven-week winning streak for the first time since 2009. Yields on 30-year Treasuries were also up at 2.382%, earlier climbing to 2.404%, the highest since early January last year . Ten-year yields had hit a one-week low of 1.475% early on Thursday but rose above 1.5% after data indicated a recovering jobs market. Data showing U.S. producer prices rising 0.5% last month also extended the rise in yields. In the repurchase agreement market, the overnight repo rate turned negative on Friday at -0.01%, as excess cash in the system weighed on the market. “This is largely a function of Treasury bill paydowns,” said Dan Belton, fixed income strategist, at BMO Capital in Chicago. He added that the Treasury’s bill supply has fallen by $55 billion this week and is expected to decline by $44 billion next week. U.S. Treasury bills outstanding have declined by more than $200 billion over the last three weeks. Belton noted though that “assets continue to flow into government money market funds, which often invest cash in repo, so the cash and collateral imbalance that has been a dominant theme in the repo market continues to drive low repo rates.” March 12 Friday 1:53PM New York / 1853 GMT Price Current Net Yield % Change (bps) Three-month bills 0.03 0.0304 -0.008 Six-month bills 0.045 0.0456 -0.007 Two-year note 99-243/256 0.151 0.008 Three-year note 99-184/256 0.3443 0.031 Five-year note 98-84/256 0.8449 0.067 Seven-year note 98-240/256 1.2851 0.087 10-year note 95-116/256 1.6229 0.096 20-year bond 93-64/256 2.2992 0.119 30-year bond 89-32/256 2.3855 0.105 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 10.25 0.50 spread U.S. 3-year dollar swap 10.00 -0.25 spread U.S. 5-year dollar swap 8.00 -1.00 spread U.S. 10-year dollar swap 1.00 -0.75 spread U.S. 30-year dollar swap -31.25 -0.75 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Mark Heinrich and David Gregorio)

By: Gertrude Chavez-Dreyfuss