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TREASURIES-Yields fall from four-month highs as stimulus in focus

 (Adds quote, updates yields)
    By Karen Brettell
    NEW YORK, Oct 23 (Reuters) - Benchmark U.S. Treasury yields
retraced from four-month highs reached earlier in the day on
Friday as investors waited to learn whether U.S. lawmakers will
strike a deal on new fiscal stimulus.
    U.S. House Speaker Nancy Pelosi said on Friday it still was
possible to get another round of COVID-19 aid before the Nov. 3
election, but that it was up to President Donald Trump to act,
including bringing along reluctant Senate Republicans.

    Even if a deal is not reached, investors see a jump in
spending as likely if Democrat Joe Biden wins the Nov. 3
election, with a larger bill more also more likely if Democrats
win control of the U.S Senate.
    “The market’s playing out inflation expectations here, based
on expectations that there’s more stimulus and, if Biden gets
in, that they will do even more spending than we’ve done under
the current administration,” said Lou Brien, a market strategist
at DRW Trading in Chicago.
    New fiscal spending should improve the U.S. economic outlook
and raises the prospect of higher inflation, which would send
yields higher. The Federal Reserve has also said that it will
allow inflation run hotter than previously before tightening
monetary policy.
    A glut of Treasury supply to finance the spending could also
weigh on the U.S. bond market.
    Benchmark 10-year Treasury yields rose as high
as 0.872%, the highest since June 9, before falling back to
0.841%. The yields are edging above their 200-day daily moving
average, which they have held under since December 2018.
    The yield curve between two-year and 10-year notes
 steepened as far as 71 basis points, the widest
spread since June 5.
    If the election result is delayed it could dampen risk
appetite and increase demand for U.S. bonds, said Zachary
Griffiths, an interest rate strategist at Wells Fargo in
Charlotte.
    "Over the next couple of weeks we think the risks are to the
downside, particularly the long term yields given the big back
up that we’ve seen for the past couple of weeks," he said. 
    Analysts also caution that ongoing economic weakness and
global demand for yield could limit any large increase in bond
yields. The Fed is also expected to shift more of its bond
purchases to longer-dated debt if it sees yields rising faster
than economic growth warrants.
    Investors have been positioning for rate increases via the
eurodollar options and swaptions markets, and any bout of profit
taking in these trades could also pull yields back lower.
 
    October 23 Friday 3:00PM New York / 1900 GMT
                               Price                  
 US T BONDS DEC0               172-20/32    0-9/32    
 10YR TNotes DEC0              138-96/256   0-12/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0925       0.0938    0.003
 Six-month bills               0.1125       0.1141    0.002
 Two-year note                 99-241/256   0.1554    0.000
 Three-year note               99-198/256   0.2016    -0.002
 Five-year note                99-106/256   0.3701    -0.005
 Seven-year note               98-116/256   0.6033    -0.005
 10-year note                  97-248/256   0.8413    -0.007
 20-year bond                  95-32/256    1.4079    -0.013
 30-year bond                  93-168/256   1.6451    -0.013
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         8.25         0.25    
 spread                                               
 U.S. 3-year dollar swap         7.75         0.25    
 spread                                               
 U.S. 5-year dollar swap         6.75         0.00    
 spread                                               
 U.S. 10-year dollar swap        2.75         0.50    
 spread                                               
 U.S. 30-year dollar swap      -34.25         1.00    
 spread (Editing by Nick Zieminski and Chizu Nomiyama)
  
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