Yields rise, curve steepens as risk sentiment improves

NEW YORK: Long-dated US Treasury yields increased on Monday as rising stocks reflected improving risk sentiment and as investors took advantage of last week's rally in bond prices to reset short trades and bets on renewed yield curve steepening.

Wall Street's main indexes opened higher on Monday, with the Nasdaq notching another record high as investors cheered signs of progress in COVID-19 vaccine development and an upbeat start to the second-quarter earnings season.

A record increase in coronavirus cases raised demand for safe haven debt late last week, with 10-year yields falling to three-month lows on Friday.

Investors are now using that move as an opportunity to reset bets that long-dated yields will rise, and to reenter trades that benefit from a steeper yield curve.

"Today what it appears is some people are using the current opportunity to either reestablish shorts, or reestablish steepener positions," said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.

Benchmark 10-year notes yields rose three basis points to 0.661%. They have traded in a relatively tight range since April, following a volatile month in March, when they fell to record lows of 0.318%. The yield curve between two-year and 10-year notes steepened one basis point to 50 basis points.

Thirty-year bond yields increased four basis points to 1.365%. The gap between five-year note and 30-year bonds yields, which is a popular steepening trade, widened two basis points to 105 basis points.

Bets that the yield curve will steepen have increased as Federal Reserve policy holds shorter-dated debt yields near record lows, while long-dated yields are vulnerable to improving economic conditions.

Analysts at Goldman Sachs on Saturday recommended shorting 10-year notes, saying that "without the Fed opening up to negative rates, (they) don't really have a lot of room to rally much further."

This comes even as new shutdowns meant to halt the spread of the coronavirus threaten further economic damage.

"Mitigation measures used to contain the outbreak are unlikely to be as far-reaching as those adopted in March/April, which means that the economic impact of the rising case count is likely to be significantly smaller," they said.