U.S. Treasuries rally on fears over COVID variant

375
2
U.S. Treasuries rally on fears over COVID variant

SYDNEY, Nov 26, Reuters -- U.S. Treasuries rallied sharply in Asia on Friday, as concerns about a new COVID 19 variant drove demand for safe-haven assets and a paring of recent bets on rate hikes through next year.

The two-year yields, a guide to short-term U.S. interest rate expectations, fell 6.7 basis points bps to 0.5767% in Tokyo trade, the sharpest drop since March 2020.

Ten-year yields fell 8.2 bps, the sharpest drop since July, to 1.5601% and five year yields fell nearly 9 bps to 1.2565%. The moves in the U.S. government bond market are still within recent ranges but they also add to some bets on higher rates put on this week after the reappointment of Jerome Powell as Federal Reserve Chair.

The variant detected in South Africa, Botswana and Hong Kong, but scientists said it could resist vaccines and be very transmissible. Travel restrictions were put in place by Britain after it was announced.

Andrew Brenner, head of international fixed income at NatAlliance Securities, said that the increase in COVID could halt the Fed in their tracks as tightening.

Long-dated government bonds extended a rally that had begun before Thanksgiving and flattened the yield curve. On Friday, the yields of the thirty-year Treasury fell by 7 bps to 1.8969%.

A run of stronger than expected U.S. data and traders' belief that Powell was the more hawkish choice for the Fed Chair has firmed bets this week that the Fed is likely to raise rates several times next year.

On Friday, some of the bets were rolled back in Asia as Fed funds futures rallied, with the December contract up 9 ticks to 99.37.

Frances Cheung, OCBC Bank rates analyst said the move appears to be mainly due to the subdued risk sentiment arising from the revelation of a virus variant.

We remain of the opinion that Fed fund futures pricing is not overly aggressive, and that some dovish triggers are needed for the market to scale back expectations.