TREASURIES-Yields on hold as market awaits COVID-19 stimulus

NEW YORK, Dec 18 (Reuters) – The Treasury yield curve steepened modestly on Friday, with moves across maturities of less than a basis point, as investors waited to see if the U.S. Congress would agree on $900 billion in fresh COVID-19 relief by the end of the day.

The 10-year yield was up 0.1 basis point at 0.931%. The 30-year yield rose 0.4 basis points to 1.679%. The decline at the short end of the curve was slightly larger, with the two-year yield last down 0.6 basis points at 0.121%, extending the steepening trend over the week.

Republicans and Democrats have made progress this week on a COVID-19 relief bill to support individuals and businesses, but enough differences remained by late on Thursday that talks looked likely to stretch into the weekend.

That would force Congress to pass a stopgap spending bill to keep the government operating for a few days after current funding expires at midnight on Friday while talks continue.

U.S. cities have reimposed shutdowns as coronavirus infections have resurged, leading to a jump in weekly jobless claims to a three-month high reported Thursday. Stimulus hopes, and the rollout this week of a COVID-19 vaccine, have so far allowed the Treasury market to shrug off the bleak labor market data.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, called the data “a troubling update on the impact COVID’s winter wave” on the labor market.

“However, the knee jerk move was only sufficient to bring 10-year yields to 89 bp before the rally retraced as the market’s attention shifted to the prospects for a near term fiscal deal.”

The yield curve has steepened this week by 3.4 basis points in the spread between two- and 10-year yields and 4.6 basis points between the five- and 30-year yields on stimulus and vaccine optimism, as well as the Federal Reserve’s decision on Wednesday to maintain its current pace and duration of bond buying.

“2s/10s and 5s/30s continue progress toward fresh highs and as late-December comes into focus, pandemic steeps will also become a reality,” said Lyngen.

“As with the outright level of rates, the evolution will be gradual and grinding at this stage in the price action – if for no other reason than the lack of an obvious and defined trigger to justify a more dramatic repricing.”

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