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TREASURIES-Yields dip on month-end demand for bonds

 (Adds data, comments from Fed's Kaplan, expansion of reverse
repo facility, updates prices)
    By Karen Brettell
    NEW YORK, April 30 (Reuters) - U.S. Treasury yields fell on
Friday as investors bought bonds for month-end portfolio
rebalancing, countering expectations of higher inflation as
businesses reopen from COVID-related shutdowns.
    “Right now it’s month-end rebalancing," said Ian Lyngen,
head of U.S. rates strategy at BMO Capital Markets in New York,
noting the next major market catalyst will be next Friday's jobs
report for April.
    Yields have held under one-year highs reached last month as
market participants wait to see if there are more indications
that inflation will rise as economic growth accelerates.
    Yields rose to two-week highs on Thursday after data showed
that gross domestic product increased at a 6.4% annualized rate
last quarter. That was the second-fastest GDP growth pace since
the third quarter of 2003 and followed a 4.3% rate in the fourth
quarter.
    The yields fell back down in the afternoon, however, and are
now trading in the middle of their recent range.
    “The market has been looking for a reason to push forward
further with the reflationary macro narrative, and when we
stalled out after the GDP numbers I think the market just said
ok, well that has proven insufficient to recast the macro
narrative so we’re range-bound,” said Lyngen.
    Benchmark 10-year yields fell one basis point to
1.629%. They have risen from 1.531% last week but are holding
below one-year highs of 1.776% reached in March.
    Inflation expectations fell on Friday despite data showing
that U.S. consumer spending rebounded in March amid a surge in
income as households received additional COVID-19 pandemic
relief money from the government.
    Other data on Friday showed labor costs jumped by the most
in 14 years in the first quarter, driven by a pick-up in wage
growth as companies competed for workers to boost production.

    Breakevens on 10-year Treasury Inflation-Protected
Securities are pricing in average annual inflation
of 2.41% for the next decade, after reaching an eight-year high
of 2.46% on Thursday.
    Inflation expectations increased after President Joe Biden
on Wednesday proposed $1.8 trillion in new spending on education
and childcare, which would be financed by raising the top
marginal tax rate for the wealthiest Americans.
    That is on top of a $2 trillion jobs-and-infrastructure plan
to be paid for by raising taxes on U.S. companies.
    Dallas Federal Reserve Bank President Robert Kaplan on
Friday called for beginning the conversation about reducing
central bank support for the economy, warning of imbalances in
financial markets and arguing the economy is healing faster than
expected.
    His comments come after Fed Chair Jerome Powell on Wednesday
said that it was too soon to discuss tapering.

    Next Friday’s employment report for April is expected to
show strong labor market improvement. The Treasury Department
will also next week announce its refunding plans for the coming
two quarters.
    Yields on Treasury bills held near zero as money markets
struggle with a surge in demand for short-dated assets, and a
shortage of bills as the Treasury curbs bill issuance and pays
down its cash balance.
    The Treasury sold $40 billion in four-week notes at a zero
yield on Thursday for the first time since last March. The bill
yields were last trading at 0.005.
    The New York Fed on Friday said that it will loosen the
eligibility requirements for its reverse repo facility,
expanding access to the program at a time when it is seeing
higher demand from institutions coping with excess cash.
 
    The cost to borrow Treasuries in the overnight repurchase
agreement (repo) markets was one basis point, after
falling to zero on Thursday.
    
      April 30 Friday 3:05PM New York / 1905 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0125       0.0127    0.000
 Six-month bills               0.025        0.0254    -0.005
 Two-year note                 99-237/256   0.1623    -0.004
 Three-year note               100-30/256   0.335     -0.005
 Five-year note                99-124/256   0.8557    -0.011
 Seven-year note               99-144/256   1.3157    -0.009
 10-year note                  95-116/256   1.6294    -0.011
 20-year bond                  95-32/256    2.1795    -0.014
 30-year bond                  90-228/256   2.299     -0.011
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        11.75         0.25    
 spread                                               
 U.S. 3-year dollar swap        14.25         0.25    
 spread                                               
 U.S. 5-year dollar swap         9.50         0.75    
 spread                                               
 U.S. 10-year dollar swap       -0.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -26.00         0.00    
 spread (Editing by Nick Zieminski and Sonya Hepinstall)
  
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