TREASURIES-U.S. yields extend rise after soft 20-year auction; curve steepens for 2nd day

U.S. 10-year yield hits 5-month high
    * U.S. 5-year yield matches 7-month peak hit Monday
    * U.S. 20-yar auction results show weak demand

NEW YORK, Oct 20 (Reuters) - U.S. long-dated Treasury yields
rose on Wednesday after a weak auction of 20-year bonds, with
the yield curve steepening for a second day and investors paring
back aggressive monetary tightening bets from the Federal
Reserve.
Prior to the curve steepening this week, the yield curve had
flattened the last few sessions on expectations that the Fed
will raise interest rates earlier than expected, pushing
short-dated yields higher.
U.S. yields also extended gains after a softer-than-expected
20-year auction that saw the yield at 2.1%, higher than the
expected rate at the bid deadline, suggesting investors demanded
a higher premium for the bond.
"It looks as though not even a significant cheapening in the
issue could boost demand given rising inflation concerns and the
generally bearish momentum in Treasuries since the September 22
FOMC," said Kim Rupert, managing director, fixed income at
Action Economics in San Francisco.
There were $54.1 billion in bids for a 2.25 bid-to-cover,
lower than 2.36 last month and the 2.35 average. Action
Economics said this was the third lowest bid-to-cover on record
for the 20-year bond, which the Treasury started selling again
in May 2020.
Overnight, the U.S. 10-year yield climbed to a five-month
peak of 1.673%, while that on the 5-year note matched a seven-
month high of 1.193% hit on Monday. 
The rise in long-dated yields steepened the curve again,
with the spread between U.S. 5-year notes and U.S 30-year bonds
at nearly 97 basis points.
"Central bank tightening fever in Europe cooled off
overnight, removing immediate pressure for consistently higher
intermediate yields," wrote Jim Vogel, senior rates strategist,
at FHN Financial, in a research note. "That also reduces the
curve flattener demand for long U.S. Treasuries at least for
today."
On Tuesday, European Central Bank chief economist Philip
Lane said market expectations for future interest rates do not
square with the ECB's guidance for no hike until inflation is
seen stable at 2%.
Analysts said the move higher overnight in U.S. long-dated
yields was spurred by comments from Fed Governor Christopher
Waller late Tuesday, saying the Fed may have to adopt "a more
aggressive policy response" if high inflation continues through
the end of the year.
Waller's views, however, differed from that of Fed Governor
Randal Quarles, who said on Wednesday that while it is time for
the Fed to begin dialing down its bond-buying program, it would
be premature to start raising interest rates in the face of high
inflation that is likely to recede next year.
Futures on the U.S. federal funds rate, which track
short-term interest rate expectations, continued to price in a
rate increase next year, although, the percentages have come
down. On Wednesday, futures traders reduced the chances of a
quarter-point tightening by the Fed in June to 46%, from 60% on
Monday. Traders also pared back the odds of a rate hike in July
to 62% from 82% on Monday.
In afternoon trading, the benchmark 10-year note yield was
up one basis point at 1.6461%.
The U.S. 5-year yield, which reflects monetary policy
expectations, was last down at 1.1538%. 
U.S. 20-year yields rose to one-week highs of
2.106%, and were last up 3 basis points at 2.1003%.
U.S 30-year yields also touched one-week peaks of 2.136%
and were last up 4 basis points at 2.1293%.

October 20 Wednesday 3:47PM New York / 1947 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.05 0.0507 -0.005
Six-month bills 0.055 0.0558 -0.005
Two-year note 99-193/256 0.3773 -0.016
Three-year note 99-198/256 0.7019 -0.008
Five-year note 98-170/256 1.1538 -0.001
Seven-year note 98-152/256 1.4637 0.000
10-year note 96-104/256 1.6479 0.014
20-year bond 94-80/256 2.1023 0.035
30-year bond 97-28/256 2.1314 0.045

DOLLAR SWAP SPREADS 
Last (bps) Net 
Change 
(bps) 
U.S. 2-year dollar swap 17.00 1.25 
spread 
U.S. 3-year dollar swap 14.75 0.25 
spread 
U.S. 5-year dollar swap 7.00 0.25 
spread 
U.S. 10-year dollar swap 0.75 0.50 
spread 
U.S. 30-year dollar swap -23.00 0.50 
spread 

Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick
Zieminski, Will Dunham and Kirsten Donovan)