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US two-year Treasury yield hits five-month lows

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US one-year CDS rises to highest since November 5

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Junk corporate bond spreads are widest since September

(Adds results of US three-year note auction, updates prices)

By Matt Tracy

March 11 (Reuters) - U.S. Treasury yields drifted higher

on Tuesday, rebounding after the yield on two-year notes hit

five-month lows earlier, as risk-off sentiment eased in global

markets a day after a Wall Street selloff.

The two-year Treasury yield was little changed at 3.891%,

after hitting 3.83% during Asian hours, its weakest

level since October 4.

The benchmark 10-year yields were up 3.2 bps at 4.244%

, holding above a near 4-1/2-month low hit last week.

On Monday, two-year yields fell around 10 basis points in

their biggest daily drop since September after U.S. President

Donald Trump declined to rule out a recession as a result of his

tariff policies.

Wall Street stocks were lower on Tuesday, but declines were

smaller compared with Monday's sellfoff in a sign that sentiment

was somewhat recovering.

"It's challenging to decipher Trump's policy and its impact

on the Treasury market," said Massimiliano Maxia, senior fixed

income specialist at Allianz Global Investors.

Maxia is neutral on Treasuries, but said his view could

change "if we have strong evidence of a significant weakening of

the U.S. economy. We have just seen some alarm bells as of now."

But in one worrying sign for the bond market, a measure of

default risk was creeping higher.

U.S. short-dated credit default swaps, instruments used to

hedge credit exposure, rose on Tuesday to their highest levels

since the U.S. election on November 5, reflecting creeping

anxiety about the U.S. debt ceiling.

One-year credit default swaps now trade at 45 basis

points, according to S&P Global, up from 43 bps on Monday. The

five-year CDS traded on Wednesday at 41 bps, also the highest

since November 5.

Junk corporate bond spreads widened to more than 300 bps on

Tuesday, their most since September, a sign that investor

confidence is deteriorating as worries about a recession and

global trade war rise.

U.S. Treasury yields, however, were little moved after the

release of economic data that met expectations. The latest job

opening figures for January showed 7.7 million vacancies. The

NFIB Small Business Optimism Index fell by 2.1 basis points in

February to 100.7.

"Optimism is fading a little bit, but it's still far from

certain that we're going to see negative economic growth," said

Guy LeBas, chief fixed income strategist at Janney Capital

Management. "It's hard to draw a line through any one data

point," he added.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at 34.3 basis points, just below its level at

Monday's close.

"The distribution of possible outcomes has increased with

the tariffs, and you could see a possible slowdown from job

loss," said Mike Sanders, portfolio manager and head of fixed

income at Madison Investments.

"I think in general you're going to have (Treasury) spreads

just trade a little directionally with where equities are going

to trade, but it's going to be a bumpy couple of months until

you see a conclusion of what's getting implemented."

On Tuesday, the U.S. Treasury auctioned $58 billion in

three-year Treasury notes. The offering received over

$156 billion in competitive bids and came with a high yield of

3.908%, slightly higher than the 3.902% expected rate forecast.

Post-auction, three-year yields were last flat at 3.893%

.