Treasuries Near Highs Before 5-Year Auction

(Bloomberg) -- Treasuries were slightly higher at U.S. midsession, at or near best levels of the day, reached between 11am and noon ET after Reuters reported Russia said its embassy in Syria was shelled. The 10-year yield extended its drop to 2 basis points, touching 2.539% while remaining inside the 5 basis-point range that’s contained it since Dec. 22, the smallest 5-day range in more than a year.

The current 5-year yield was little changed at 2.048% ahead of the $34b auction at 1pm, with the when-issued 5-year yield around 2.068%, above 5-year auction stops since April 2011.

• Positives for the sale include the high outright yield and expectations that Treasuries will benefit this week from month-end index extensions and quarter-end rebalancing that favors bonds vs equities; negatives include the sector’s sensitivity to Fed rate increases, however it has cheapened on the curve since the Dec. 14 FOMC meeting caused the market to price in 2 rate hikes in 2017 (see PREVIEW)
• Treasuries also firmed after underperformance of bunds pushed the U.S.-German 10-year yield spread to generational wides above 237 basis points; on the move to session highs for the U.S. 10-year, the spread narrowed back to 234 basis points, little changed on the day
• The U.S.-U.K. 10-year spread remained at its wides above 124 basis points
• The U.S. 5s30s curve is flatter by about 1.5 basis point, comparable to U.K. curve shift; JGB 5s30s steepened by 3.7 basis points after the BOJ eased long-end purchases

To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net, Edward Bolingbroke in New York at ebolingbrok1@bloomberg.net. To contact the editor responsible for this story: Boris Korby at bkorby1@bloomberg.net.