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U.S. Treasury yields tumbled on Friday as concerns about new lockdowns related to the spread of COVID-19 in Europe increased demand for the safe haven bonds, though the move was likely exaggerated by impaired liquidity that has plagued the market for the past few weeks. 

Germany's health minister said a lockdown, including vaccinated people, could not be ruled out. Austria said it will reimpose a full lockdown next week and require its entire population to be vaccinated as of February. 

Europe has again become the epicenter of the pandemic in recent weeks. Markets, which had been relatively calm despite the outbreak so far, moved sharply on the news, sending Germany's entire yield curve back into negative territory for the first time since August. 

The European response has raised some concerns that new lockdowns could also happen in the United States if there is a dramatic rise in cases, which would hurt the economy. 

“Even though Europe has been more aggressive than the U.S. in terms of heavy-handed government responses to COVID, there is always chatter about how we could see the same sort of stuff happening over here if cases were to increase significantly," said Tom Simons, a money market economist at Jefferies in New York, though he added that “I don’t think those fears are necessarily justified." 

The size of the reaction, which sent 10-year yields down as much as nine basis points on the day, also indicates impaired market liquidity that analysts say is in part because hedge funds burned by volatile moves in October and November have pulled back from the market. 

“The hedge fund community is not in there in the same way that they normally are and that could be creating a little more of an illiquid market and a little bit more rate movement than normally we would otherwise see," said Simons. 

Benchmark 10-year notes last yielded 1.536%, down five basis points on the day, after dropping as low as 1.515%. the lowest since Nov. 10. Shorter-dated Treasury yields surged in October, while 30-year bond yields plunged as a rapid rise in inflation led investors to adapt to the possibility that the U.S. Federal Reserve may need to raise rates as soon as mid-2022 to stem price pressures. 

The move created rapid flattening in the curve between five-year notes and 30-year bonds as many investors who had bet on steepening were stopped out of their trades. That curve was last at 76 basis points, after reaching 62 basis points on Nov. 12, which was the flattest since March 2020. It is down from 115 basis points on Oct. 6. Liquidity is also expected to worsen next week before the market will close on Thursday for Thanksgiving. The Treasury next week will sell $176 billion in new coupon-bearing supply, including $58 billion in two-year notes and $59 billion in five-year notes on Monday, as well as $59 billion in seven-year notes on Tuesday. 

November 19 Friday 9:35 AM New York / 1435 GMT Price Current Net Yield % Change (bps) Three-month bills 0.05 0.0507 0.000 Six-month bills 0.0625 0.0634 0.000 Two-year note 99-216/256 0.456 -0.046 Three-year note 99-216/256 0.8031 -0.042 Five-year note 99-204/256 1.1674 -0.056 Seven-year note 99-184/256 1.4177 -0.055 10-year note 98-132/256 1.536 -0.051 20-year bond 100-148/256 1.9648 -0.037 30-year bond 98-164/256 1.935 -0.038 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 25.00 0.75 spread U.S. 3-year dollar swap 19.00 -0.25 spread U.S. 5-year dollar swap 10.00 0.25 spread U.S. 10-year dollar swap 4.00 0.25 spread U.S. 30-year dollar swap -20.25 -0.25 spread 

This story has been published from a wire agency feed without modifications to the text.

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