TREASURIES-Yields rise as markets calm before Fed decision

(Adds data, Yellen comments, auction results, updates prices) By Karen Brettell NEW YORK, March 21 (Reuters) - U.S Treasury yields gained on Tuesday as improving risk sentiment reduced safe-haven demand for the U.S. debt before the Federal Reserve will conclude its two-day meeting on Wednesday. Shares of U.S. regional lenders, including battered First Republic Bank, surged as Credit Suisse's rescue eased fears of a wider banking crisis. The U.S. banking system is stabilizing after strong actions from regulators, but further steps to protect bank depositors may be needed if smaller institutions suffer deposit runs that threaten more contagion, U.S. Treasury Secretary Janet Yellen told bankers on Tuesday. “It feels like the markets are a little bit more comfortable with the global central banks being able to manage the regional bank issue in the U.S., and Credit Suisse in the case of the banking system, so there’s a little relief from that perspective,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. Also, “we didn’t really see a large take-up in the dollar swap lines yesterday,” she added. The Fed said on Sunday it had joined with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank in a coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements. Benchmark 10-year Treasury yields have risen from a six-month low of 3.291% reached on Monday but remain well below their 15-year peak of 4.338% reached on Oct. 21. They were last at 3.604%.

Interest rate-sensitive two-year yields rose to 4.177% and are also up from a six-month low of 3.635% on Monday, but are sharply below the almost 16-year high of 5.084% hit on March 8. The closely watched yield curve between two-year and 10-year notes remains deeply inverted at minus 58 basis points, a level that still indicates a looming recession, though it remains off its extreme levels of minus 111 basis points reached on March 8. The next major focus will be the Fed’s interest rate decision on Wednesday, when many investors expect the U.S. central bank to hike rates by an additional 25 basis points but also indicate that further rate decisions will be data-dependent. Markets will also key in on new rate projections in the so-called “dot plot” to see how Fed officials are balancing the need to reign in still high inflation against the risk higher rates may pose to the banking sector. “It’s a little bit tricky given that inflation prints thus far show that there aren’t really any steady signs of disinflation ... they probably have to stick to their plan so that they sound credible on not just the policy front but also on the regulatory front that they have the tools in place to be able to handle the issues with the regional banks,” said Rajappa. The Treasury Department saw solid demand for a $12 billion sale of 20-year bonds on Tuesday. The debt sold at a high yield of 3.909%, close to where it had traded before the auction.

The bid-to-cover ratio was 2.53 times, the lowest since October. The Treasury will also sell $15 billion in 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. Data on Tuesday showed that U.S. existing home sales rebounded more than expected in February as lower mortgage rates and the first year-on-year decrease in prices in 11 years pulled buyers back into the market.
March 21 Tuesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 4.62 4.7401 0.120 Six-month bills 4.7275 4.924 0.163 Two-year note 100-211/256 4.177 0.253 Three-year note 101-202/256 3.9823 0.201 Five-year note 101-38/256 3.7428 0.173 Seven-year note 101-216/256 3.6961 0.140 10-year note 99-36/256 3.6037 0.127 20-year bond 99-128/256 3.9112 0.078 30-year bond 98-8/256 3.7347 0.073
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 29.25 4.25
spread
U.S. 3-year dollar swap 17.00 3.00
spread
U.S. 5-year dollar swap 9.25 0.50
spread
U.S. 10-year dollar swap 2.50 0.75
spread
U.S. 30-year dollar swap -45.50 0.00
spread

(Reporting by Karen Brettell; editing by Jonathan Oatis)