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Fed meeting minutes raise hopes for earlier end to QT

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Initial jobless claims rise slightly in latest week

(Updated in New York afternoon time)

By Karen Brettell

NEW YORK, Feb 20 (Reuters) - U.S. Treasury yields edged

lower on Thursday after comments from the top Treasury official

eased concerns of any looming increase in the size of

longer-dated debt auctions.

Treasury Secretary Scott Bessent said a near-term change is

not planned given hurdles, including the Federal Reserve's

quantitative tightening program, Bloomberg News reported on

Thursday.

"It further kicks the can down the road for a higher

issuance, maybe the end of this year, beginning of 2026 at the

earliest, but we already knew that from the last refunding

announcement," said Will Compernolle, macro strategist at FHN

Financial in Chicago.

Traders had been expecting Bessent to issue more

longer-dated debt after formerly criticizing the Treasury under

his Democratic predecessor, Janet Yellen, for relying heavily on

short-term debt issuance.

But at its latest refunding announcement, the first under

Bessent, the Treasury said it expects to keep most of its debt

issuance plans unchanged for at least the next few quarters.

Bessent's comments followed the release on Wednesday of

minutes from the latest Federal Reserve meeting that showed

policymakers discussed slowing or pausing the Fed's quantitative

tightening program.

The Fed has been letting bonds roll off its balance sheet

without replacement since June 2022. Slowing or pausing the

program may reduce the amount of debt the Treasury Department

needs to offer.

Fed officials flagged the challenge of getting a clear read

on market liquidity as the Treasury wrangles with the

reinstatement of the U.S. debt ceiling on January 2, which

affects how it can manage cash.

Some analysts say the Fed may now end the program earlier

than previously expected.

"It may not make sense to pause QT, say, the March or

May meetings, only to briefly restart and end asset roll-offs in

September or October. Instead, we think the Fed is more likely

to end QT early than pause or taper," Barclays analyst Joseph

Abate said in a report on Thursday.

The Treasury saw solid demand for a $9 billion sale of

30-year Treasury inflation-protected securities on Thursday.

The debt sold at a high yield of 2.403%, which was the

highest yield in a 30-year TIPS auction since the Treasury

reintroduced the security in 2010, according to analysts at BMO

Capital Markets. Demand was 2.48 times the amount on offer.

Meanwhile, data on Thursday showed that the number of

Americans filing new applications for unemployment benefits

increased moderately last week, suggesting that the labor market

remained on solid ground.

The yield on benchmark U.S. 10-year notes was

last down 3.4 basis points on the day at 4.501%.

The two-year note yield fell 0.8 basis point to

4.266%.

The yield curve between two-year and 10-year notes

flattened by around three basis points to 23

basis points.

St. Louis Fed President Alberto Musalem on Thursday raised

the twin risks of rising inflation expectations and

difficult-to-address stagflation in remarks that highlighted the

potentially difficult choices facing the U.S. central bank.

Chicago Fed President Austan Goolsbee, in separate

remarks on Thursday, gave a tempered view on inflation risks,

saying he

does not expect

the inflation reading the U.S. central bank uses to set its

inflation target to be as "sobering" as the previously reported

Consumer Price Index

figures.

Traders are concerned that tariffs planned by President

Donald Trump will add to already sticky inflation.

Market volatility over tariff announcements has fallen in

recent weeks, however, as the tariff implementation has been

delayed, raising hopes that they are a negotiating tool and may

not be as bad as feared.

Trump said on Wednesday he would announce tariffs over the

next month or sooner, adding lumber and forest products to

previous plans to impose duties on imported cars, semiconductors

and pharmaceuticals.

Developments in discussions for a Russia-Ukraine peace deal

are also in focus.

Trump's envoy for the conflict in Ukraine met President

Volodymyr Zelenskiy in Kyiv on Thursday, but there was no

immediate word on whether their talks had helped smooth over an

unprecedented wartime rift between the once firm allies.