TREASURIES-Yields rise after seven-year auction, before Fed statement

 (Recasts with seven-year auction results, adds quote, updates
    By Karen Brettell
    NEW YORK, April 27 (Reuters) - U.S. Treasury yields rose on
Tuesday despite the Treasury Department seeing improved demand
for a $62 billion sale of seven-year notes, and before the
Federal Reserve will on Wednesday conclude its two-day meeting.
    Nerves had increased over the seven-year auction after the
maturity drew weak demand at auctions in February and March.
    “The seven-year auction was widely anticipated just because
of the bad previous two auctions, so it was nice to see it make
somewhat of a comeback,” said Eric Souza, senior portfolio
manager at SVB Asset Management.
    The notes sold at a high yield of 1.306%, close to where
they had traded before the auction. Yields increased in the
leadup to the sale, which may have improved demand. Dealers took
a below average share of 22.33% of the debt, indicating solid
investor interest.
    On Monday, there was solid demand for $60 billion sale of
two-year notes and $61 billion in five-year notes.

    Yields initially dipped on the auction results, before
continuing to march higher. Seven-year yields gained
four basis points to 1.300% after earlier reaching 1.309%, the
highest since April 15.
    Benchmark 10-year note yields rose five basis
points to 1.618%, the highest since April 20. They have dropped
from a more than one-year high of 1.776% last month.
    The auction came before the Fed’s meeting statement on
Wednesday and U.S. Gross Domestic Product data due on Thursday,
which is expected to show strong first-quarter growth as the
economy recovered from COVID-19 related shutdowns.
    The Fed is expected to acknowledge economic improvement and
investors will watch for indications of when it may begin to
taper its bond purchases.
    “My base expectation is we start seeing the Fed take some
baby steps towards preparing the markets for some kind of
potential announcement on tapering in the middle of the year,”
said Subadra Rajappa, head of U.S. rates strategy at Societe
Generale in New York.
    The Fed faces a challenge in preparing the market for a
reduction in bond purchases without sparking a “taper tantrum”,
which could send yields spiraling higher and potentially derail
economic progress.
    “You definitely don’t want a taper tantrum,” said Souza. “If
they are thinking of tapering by the end of the year, you need
to start having some sort of hints to the market.”
    Market participants will also watch to see if the U.S.
central bank raises the interest it pays on excess reserves
(IOER) and overnight reverse repurchase agreements as borrowing
rates in repo intermittently trade negative and short-term bill
yields approach zero.
    Overnight repo rates were at one basis point on
Tuesday. They traded as low as minus six basis points last
    One-month Treasury bill yields were also one
basis point, after jumping as high as four basis points on
    The federal funds rate has stayed relatively
steady at seven basis points. Analysts expect the Fed will hike
the IOER if the fed funds rate falls below five basis points.
    April 27 Tuesday 3:30PM New York / 1930 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.015        0.0152    -0.008
 Six-month bills               0.035        0.0355    -0.002
 Two-year note                 99-228/256   0.1798    0.001
 Three-year note               100-14/256   0.3564    0.007
 Five-year note                99-96/256    0.878     0.027
 Seven-year note               99-172/256   1.2997    0.038
 10-year note                  95-140/256   1.6181    0.048
 20-year bond                  95-60/256    2.1723    0.044
 30-year bond                  91-40/256    2.2858    0.042
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        10.75        -0.25    
 U.S. 3-year dollar swap        13.25         0.50    
 U.S. 5-year dollar swap         7.50        -1.75    
 U.S. 10-year dollar swap       -1.00         0.00    
 U.S. 30-year dollar swap      -27.25         0.00    
 spread (Editing by Kirsten Donovan; Editing by David Gregorio)