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Yields pare gains after Omicron variant found in U.S.

Kitco News

NEW YORK, Dec 1 (Reuters) - Longer-dated U.S. Treasury yields were little changed after giving up earlier gains on Wednesday as the Omicron coronavirus variant was found in the United States, though short-dated yields stayed higher on chances that the U.S. Federal Reserve will speed up its bond purchase tapering.

The United States identified its first case of the new variant in a fully vaccinated traveler who had returned from South Africa on Nov. 22 and had mild symptoms. read more

It came after yields had bounced earlier in the day, following Fed Chair Jerome Powell's comments on Tuesday that U.S. central bankers in December will discuss whether to end their bond purchases a few months earlier than had been anticipated. read more

"Powell yesterday in his hawkish tilt removed a good deal of potential uncertainty in terms of coming Fed rhetoric as he basically confirmed that the hawkish shift that we've heard from other officials since the last FOMC remains intact," said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York.

High inflation, now running at more than twice the Fed's flexible target of 2% annually but which the central bank has for months characterized as "transitory," is only expected to ease in the second half of 2022, Powell said. "I think it's probably a good time to retire that word."

"They are starting to discount the fact that inflation is transitory," said Tom di Galoma, managing director at Seaport Global Holdings in New York. "They are probably going to drop the transitory comment from future releases and future testimony."

Powell repeated on Wednesday that with the U.S. economy growing strongly and supply-demand imbalances poised to persist in the near future, policymakers need to be ready to respond to the possibility that inflation may not recede in the second half of next year as expected. read more

New York Fed President John Williams also said the latest COVID-19 variant could extend some of the supply-chain challenges and shortages that have led to higher inflation. read more

Benchmark 10-year yields were little changed on the day at 1.434%, after earlier rising to 1.506%.

Two-year yields , which are highly sensitive to interest rate moves, jumped 4 basis points to 0.563%. They are holding below a high of 0.687% reached on Nov. 23, which was the highest since March 2020.

The yield curve between two-year and 10-year notes was at 86 basis points. It has flattened from 130 basis points in October as investors price more rate hikes into short- and intermediate-dated notes. Longer-dated debt remains relatively in demand on expectations that the rate hikes will dampen inflation and growth longer-term.

Futures traders are almost fully pricing in a rate increase at the Fed's June 2022 meeting.

Treasuries showed little reaction to the ADP National Employment Report on Wednesday that showed private payrolls increased by 534,000 jobs last month. The next major U.S. economic release will be Friday's jobs report for November. read more

The U.S. economy expanded at a modest-to-moderate pace in October and the first half of November while firms grappled with rising inflation and a scramble to fill jobs amid labor shortages, a survey conducted by the Fed showed on Wednesday. read more

Volatility is expected to stay high at least through year-end as the market struggles with low liquidity and uncertainty around the Fed's future rate path. The ICE BofA MOVE Index (.MOVE), a measure of volatility in U.S. Treasuries, is trading at its highest level since March 2020.

Inflation expectations have also fallen as investors price in the greater likelihood of faster rate increases.

Breakeven rates on five-year Treasury Inflation-Protected Securities have fallen to 2.74%, from around 3.20% in mid-November.

December 1 Wednesday 3:00PM New York / 2000 GMT

Price
Current Yield %
Net Change (bps)
Three-month bills
0.055
0.0558
0.003
Six-month bills
0.1025
0.104
0.000
Two-year note
99-224/256
0.5631
0.037
Three-year note
99-192/256
0.8359
0.024
Five-year note
100-118/256
1.1548
0.008
Seven-year note
100-248/256
1.3544
-0.010
10-year note
99-116/256
1.4341
-0.007
20-year bond
102-120/256
1.8514
0.003
30-year bond
102-64/256
1.7778
-0.008
DOLLAR SWAP SPREADS
Last (bps)
Net Change (bps)
U.S. 2-year dollar swap spread
23.50
-1.75
U.S. 3-year dollar swap spread
22.75
-0.75
U.S. 5-year dollar swap spread
11.50
-0.75
U.S. 10-year dollar swap spread
7.00
0.00
U.S. 30-year dollar swap spread
-16.00
0.00
Editing by Mark Heinrich and Peter Graff
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