TREASURIES-Solid five-year auction pulls yields down from highs

(Adds data, auction results, details, updates prices) By Karen Brettell NEW YORK, March 28 (Reuters) - U.S. Treasury yields fell from session highs on Tuesday after the Treasury Department saw solid demand for an auction of five-year notes. It came after an earlier increase as investors become more optimistic that recent stress in the banking system will be contained. The Treasury sold $43 billion in five-year notes at a high yield of 3.665%, almost a basis point below where they had traded before the auction. Demand for the debt was 2.48 times the amount on offer, the same ratio as February's five-year auction. It was the second sale of $120 billion in short- and intermediate-dated supply this week. Demand for a $42 billion auction of two-year notes on Monday was weak. The Treasury will also sell $35 billion in seven-year notes on Wednesday. Yields have risen from six-month lows reached on Friday as stress in the banking sector appears to subside, following the collapse of Silicon Valley Bank and Signature Bank earlier this month. Greater confidence in the banking system has also increased the likelihood that the Federal Reserve will be able to complete another rate increase as it focuses on bringing down inflation.

“The bigger picture story will be towards downward pressure on rates as we progress through 2023 because we will in all probability get closer to rate cuts,” said Padhraic Garvey, regional head of research, Americas at ING. “But in the very short term it wouldn’t surprise me if this marketplace began to focus a little bit away from the banking story and more on the fundamentals, which are still reasonably strong," Garvey said. "They will weaken, but they’re reasonably strong and we still have an inflation battle to fight and technically we’re still in a rate hiking environment.”

Fed funds futures traders are now pricing in a roughly equal chance that the Fed will hike rates by 25 basis points in May, or leave them unchanged at 4.75-5.00%. They are also pricing for the rate to fall to 4.26% by December, from 4.83% now. Benchmark 10-year yields were last up one basis point on the day at 3.541%. They are up from a six-month low of 3.285% on Friday, but remain below a 15-year high of 4.338% on Oct. 21. Two-year yields rose seven basis points to 4.031%, up from a six-month low of 3.555% on Friday but below the almost 16-year high of 5.084% hit on March 8. The closely watched yield spread between two-year and 10-year notes was last at minus 49 basis points. Data in the coming weeks will be closely watched for any signs of economic slowdown with the impact of tighter lending standards brought by the banking crisis expected to become more apparent. Personal Consumption Expenditures (PCE) data on Friday is the next major focus. Data on Tuesday showed that U.S. consumer confidence unexpectedly increased in March, but Americans are becoming a bit anxious about the labor market and expect inflation to remain elevated over the next year.

March 28 Tuesday 2:07PM New York / 1807 GMT Price Current Net Yield % Change (bps) Three-month bills 4.645 4.7661 0.014 Six-month bills 4.6575 4.8493 -0.030 Two-year note 99-180/256 4.031 0.066 180 102-46/256 3.8389 0.047 Three-year note Five-year note 101-160/256 3.6359 0.041 Seven-year note 102-112/256 3.5986 0.027 10-year note 99-168/256 3.5412 0.013 20-year bond 99-172/256 3.8986 0.002 30-year bond 97-144/256 3.7613 0.001
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 32.00 3.00
spread
U.S. 3-year dollar swap 16.25 0.00
spread
U.S. 5-year dollar swap 5.75 -0.75
spread
U.S. 10-year dollar swap -1.00 0.00
spread
U.S. 30-year dollar swap -47.50 -0.25
spread

(Reporting by Karen Brettell; Editing by Andrea Ricci and Tomasz Janowski)