TREASURIES-Inflation worries undermine bond prices

* Five-year TIPS breakevens continue recent climb

* Benchmark notes may be set for near-term range trade

* T-bill squeeze eases, repurchase rates rise
(Adds strategists’ quotes, updates prices)

By Chris Reese

NEW YORK, April 6 (Reuters) – U.S. Treasuries yields rose
on Wednesday for a second day with particular weakness in
longer-dated securities as investors worried about the eventual
impact from inflation amid soaring energy prices.

Breakevens on some Treasury inflation-protected securities,
which reflect market inflation expectations, rose as unrest in
the Middle East and North Africa bumped oil prices up to
two-and-a-half year peaks.

TIPS breakeven rates have been steadily rising, with some
traders fearing the U.S. central bank will lose control of
inflation as it seeks to stimulate the economy. The five-year
breakeven rate on Wednesday rose to the highest since at least
December 2008, according to data from Tradeweb.

“The rose-colored glasses are back on for growth and the
market’s over-arching concern is on unwanted inflation,” said
William O’Donnell, head of U.S. Treasury strategy at RBS
Securities in Stamford, Connecticut.

The minutes of the Federal Open Market Committee meeting
last month — released on Tuesday — acknowledged the surge in
oil and food prices, but most members of the rate-setting body
thought inflationary risk from the commodity spike would be
temporary.

Inflation erodes the value of Treasuries over time, and the
30-year bond (US30YT=RR: Quote, Profile, Research) was particularly hard hit, trading
30/32 lower in price to yield 4.56 percent, up from 4.50
percent late on Tuesday.

Benchmark 10-year notes (US10YT=RR: Quote, Profile, Research) were trading 10/32
lower in price to yield 3.52 percent, up from 3.48 percent late
on Tuesday.

A convergence of moving averages on benchmark yields could
mean the notes are headed for a range trade similar to late
last year and early this year, when they held between about
3.25 percent and 3.55 percent, said David Ader, head of
government bond strategy at CRT Capital Group in Stamford,
Connecticut.

“We have, in tens, the five-day (moving average) at 3.45
percent, the nine-day at 3.44 plus percent, the 21-day at 3.39
percent, the 40-day at 3.46 percent,” Ader said.

“We could be facing a repeat of the late December to early
February sideways grind as these various moving averages
converge — while we sorely would like to give you a 25 to 50
basis point directional perspective, we simply don’t see one at
this time.”

Meanwhile, a meeting by the European Central Bank on
Thursday, where it is expected to raise interest rates, will
also be closely watched by U.S. debt investors.

“I think everyone’s focused on the ECB on Thursday,” with
few other major data releases, said Richard Bryant, head of
Treasury trading at MF Global Securities in New York.

Two-year notes (US2YT=RR: Quote, Profile, Research) were trading unchanged in price
to yield 0.83 percent, while five-year notes (US5YT=RR: Quote, Profile, Research) fell
3/32 in price to yield 2.29 percent, from 2.27 percent late
Tuesday.

A squeeze on short-term rate collateral, meanwhile, eased
with repo borrowing rates and fed fund rates both rising off
their lows.

“There was a lot of uncertainty about what was going to
happen with that, it was a large contributor to the overall
volatility in the market over the past two days,” said Keith
Blackwell, interest rate strategist at RBC Capital Markets in
New York.

Fears that the Federal Reserve would need to intervene to
ease a shortage of very short-dated Treasury bills in a reverse
repurchase operation hurt shorter and intermediate-dated
Treasury notes on Tuesday.

Reverse repurchases are seen as a tightening measure and
hurt shorter maturities like two-year notes, which are seen as
being the most vulnerable to interest rate risk.

One-month Treasury bill yields (US1MT=RR: Quote, Profile, Research) rose to 4.5 basis
points on Wednesday, after falling to near zero on Monday.
(Additional reporting by Karen Brettell; Editing by Dan
Grebler)

TREASURIES-Inflation worries undermine bond prices