Yields dip as investors buy bonds for month-end

NEW YORK: US Treasury yields fell slightly on Friday on demand for the debt to rebalance investor portfolios for month-end, countering expectations of higher inflation as businesses reopen from COVID-19 related shutdowns.

"Right now it's month-end rebalancing," said Ian Lyngen, head of US 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 on 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 rangebound," said Lyngen.

Benchmark 10-year yields were last 1.637%, down less than one basis point on the day. The 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 US consumer spending rebounded in March amid a surge in income as households received additional COVID-19 pandemic relief money from the government, building a strong foundation for a further acceleration in consumption in the second quarter.

Breakevens on 10-year Treasury Inflation-Protected Securities are pricing in average annual inflation of 2.42% for the next decade, after reaching an eight-year high of 2.46% on Thursday.

Inflation expectations increased after US President Joe Biden late 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 US companies.

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 0.008%.

The cost to borrow Treasuries in the overnight repurchase agreement markets (repo) was one basis point, after falling to zero on Thursday.