TREASURIES-Last day of 2020 trading sees yields dip, curve flatten

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NEW YORK, Dec 31 (Reuters) - U.S. Treasury yields fell on Thursday, the last trading day of the year, pulling the yield curve flatter, as thin volume exaggerated market moves.

Yields on long-dated Treasury bonds fell despite an unexpected drop in unemployment claims for a second straight week. The decline ran counter to recent trends higher in long-dated yields and a steepening in the Treasury curve on hopes that the distribution of a vaccine would help end the coronavirus pandemic, which has plunged the global economy into crisis and killed nearly 2 million people.

Though longer-dated yields have risen since the all-time lows hit in March, the 10-year yield ended 2020 down 100 basis points and the 30-year yield ended the year down 74 basis points. The two-year yield, which has remained anchored since the Federal Reserve cut interest rates to near-zero, ended the year down 144 basis points.

The anchored two-year yield has allowed the yield curve - as measured by the spread between the two- and 10-year yields - to steepen by 44.8 basis points this year. The two-year yield is likely to remain near its current level of 0.123% until the Fed adjusts its interest-rate policy.

Yields at the long end of the curve could continue to rise - the general trend they have followed since a low in August - if economic data improves in the new year.

Initial claims for state unemployment benefits slid to a seasonally adjusted 787,000 for the week ended Dec. 26, from 806,000 in the prior week, the Labor Department said on Thursday.

“The weekly claims numbers left some hope for a positive non-farms payroll print in just over a week’s time,” said Bill O’Donnell, rates strategist at Citigroup.

The government will release its closely watched monthly jobs report on Jan. 8.

The benchmark 10-year yield on Thursday fell 1 basis point to 0.917%, pulling the spread between the two- and 10-year yields down to 79.2 basis points, the lowest in a week. The yield on the 30-year bond was last down 1.6 basis points at 1.646%.

Though the drop in jobless claims is a positive sign for the U.S. economy, thin trading volume skewed the Treasury market’s response to the data. With few people in the office, an early shutter of the Treasury market Thursday and some international markets already closed ahead of the Friday New Year’s holiday , yields were being directed by one-off trades rather than broader trends.

“Overnight Treasury volume was about 35% of average with some key markets shut,” said O’Donnell. (Reporting by Kate Duguid Editing by Leslie Adler)