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U.S. yields fall in tandem with gilts as UK U-turn calms markets

By: Gertrude Chavez-Dreyfuss

U.S. Treasury prices rose on Monday, pushing benchmark 10-year yields lower for the first time in three days and tracking moves in the UK bond market, after new finance minister Jeremy Hunt reversed most of Prime Minister Liz Truss’s economic growth plan. That injected an air of optimism in global markets after days of political and financial chaos.

“The news out of the UK was constructive in general. You have UK yields down….on the long end. I suspect we’re following suit,” said Gregory Faranello, Head of U.S. Rates at AmeriVet Securities in New York. “If we throw it altogether in a blender, obviously the events in the UK in a market that was already pretty volatile was not helpful. To the extent, that we get calming of the forces if you will, that’s probably good for all markets.”

Hunt scrapped Truss’s economic plan and scaled back her vast energy subsidy on Monday, launching one of the biggest U-turns in British fiscal policy to stem a dramatic loss of investor confidence. He said the planned tax cut changes would raise 32 billion pounds ($36 billion) every year. UK 30-year gilts were down around 44 basis points to 4.335% and the 20-year was down a similar amount at 4.416%. U.S. Treasury yields fell as well. The yield on 10-year Treasury notes was down 4.1 basis points at 3.965%. U.S. 30-year Treasury bond was down 0.6 basis points at 3.969 %.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, remained inverted at -47.2 basis points, a day after hitting -54.7, its most inverted level in more than 22 years. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 7.6 basis points at 4.431%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.552%, up from Friday’s 2.5111%. The 10-year TIPS breakeven rate was also up at 2.4615%.

On Friday, the U.S. Treasury Department asked primary dealers of U.S. Treasuries whether the government should buy back some of its bonds to improve liquidity in the $24 trillion market. In practical terms, buybacks would be focused in less liquid off-the-run Treasuries in favor of larger auction sizes. Off-the-run Treasuries are all Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity.

“Optically, we suspect the process would look similar to QE (quantitative easing) in that there would be regularly scheduled operations in which the dealer community would participate,” said BMO in a research note. “However unlike QE the funds that would be used to purchase the bonds would not be created by the Fed, but rather be excess cash already on hand at the Treasury Department. This would allow more nimble cash management and presumably a more stable front-end issuance regime.”