TREASURIES-U.S. yields plunge on fears virus variant to hamper growth

(Adds Treasury auctions later in week, COVID-19 case data) By Herbert Lash NEW YORK, July 19 (Reuters) – U.S. Treasury bond yields tumbled to five-month lows on Monday as the rapid increase in new coronavirus cases sparked fears global growth would slow and hamper the reopening of economies. The average number of new U.S. COVID-19 cases per day has tripled in the past 30 days, according to an analysis of Reuters data. In the month from June 18 to Sunday, it climbed from 12,004 to 32,136. New cases, hospitalizations and deaths due to the Delta variant have been on the rise in recent weeks but markets overall only reacted on Monday. “This looks like a global flight to quality/risk-off event,” said Scott Buchta, head of fixed income strategy at Brean Capital in Chicago. “The speed to the move down in yields almost mirrors the pace at which yields moved higher in February and March – too far, too fast,” he said in an e-mail. The yield on benchmark 10-year notes fell 12.2 basis points to 1.177%, close to the session’s low of 1.176%, a level last seen in February. Yields on the 30-year Treasury bond slid 11.8 basis points to 1.812% as stock markets worldwide fell while the safe-haven dollar and Swiss franc rose in a flight to safety. The fundamental drivers of the bond market point to yields moving higher, not lower, said Stan Shipley, macro research analyst at Evercore ISI in New York. “But the wild card that we’ve had to deal with for the last year and a half is the coronavirus and now the variant,” he said. “Most data on the variant unfortunately is deteriorating, so people are scrambling for safety until they can figure out what’s happening.” The Delta variant’s spread has sparked risk-aversion, pushing U.S. and European bond yields lower and leaving stocks facing their longest losing streak since the pandemic first hit global markets 18 months ago. Fed Fund futures, a widely used security for hedging short-term interest rate risk, showed the chances of the Federal Reserve hiking rates in December 2022 dropped to 58% from 90% on July 13, when the U.S. consumer price index was released. The likelihood that the Fed hikes rates in January 2023 fell to 70% from 100% last Tuesday, while futures now are fully pricing in a hike in March 2023. Japanese stocks fell for a fourth straight session as the variant hit sentiment, England’s “freedom day” ending COVID-19 lockdowns was marred by surging infections and Australian officials said Victoria state would extend a lockdown to slow the variant’s spread. “That’s the sentiment that’s driving the rates market today – the expectation that maybe we’ll slip back a little bit after all the progress we’ve made,” said Gennadiy Goldberg, interest rate strategist at TD Securities in New York. 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, was at 96.8 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.9 basis points at 0.208%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.448%. The 10-year TIPS breakeven rate was last at 2.257%, indicating the market sees inflation averaging just under 2.3% a year for the next decade. The U.S. Treasury will auction $24 billion of 20-year bonds on Wednesday and $16 billion of 10-year TIPS on Thursday. July 19 Monday 3:03PM New York / 1903 GMT Price Current Net Yield % Change (bps) Three-month bills 0.045 0.0456 0.000 Six-month bills 0.0475 0.0482 -0.003 Two-year note 99-215/256 0.2075 -0.019 Three-year note 100 0.375 -0.055 Five-year note 100-234/256 0.6867 -0.091 Seven-year note 101-240/256 0.9609 -0.110 10-year note 104-36/256 1.1772 -0.122 20-year bond 108-168/256 1.7321 -0.124 30-year bond 112-236/256 1.8121 -0.118 DOLLAR SWAP SPRES Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.00 -0.75 spread U.S. 3-year dollar swap 8.25 -1.75 spread U.S. 5-year dollar swap 6.00 -1.75 spread U.S. 10-year dollar swap -2.75 -1.50 spread U.S. 30-year dollar swap -31.50 -1.50 spread (Reporting by Herbert Lash; Additional reporting by Karen Brettell, Gertrude Chavez-Dreyfuss in New York and Karen Pierog in Chicago; Editing by Kirsten Donovan, Dan Grebler and Andrea Ricci)