(Recasts, updates yields, adds comments from analyst and Fed
official)
    By Karen Pierog
    Feb 16 (Reuters) - The 10-year U.S. Treasury yield rose
above 1.3% for the first time in nearly a year on Tuesday and
the yield curve steepened as expectations of extended fiscal and
monetary stimulus alongside hopes of an economic upswing added
momentum to the reflation trade. 
    The benchmark yield, which reached 1.309%, its
highest level since Feb. 27, 2020, when the Coronavirus pandemic
was beginning to affect markets, was last up 9.9 basis points at
1.2989%. 
    The 30-year U.S. yield also rose, touching a
one-year high of 2.095%. It was last 8.1 basis points higher at
2.0853%.
    "The market is simply looking at the pace of recovery, the
pace of the vaccine rollout, and the size of the stimulus
package, along with an easy (U.S. Federal Reserve) and saying,
'Well, the Fed can sit on the short end, but the long end is
going to really reflect the expectation for stronger growth,
higher inflation down the road,'" said Kathy Jones, chief fixed
income strategist at the Schwab Center for Financial Research in
New York.
    Back from Monday's Presidents Day holiday, Treasuries were
catching up with a global bond sell-off, with German 10-year
yields hitting an eight-month high on Tuesday.

    U.S. President Joe Biden has been drumming up support for a
$1.9 trillion coronavirus relief package. Meanwhile, optimism
about vaccine rollouts has lifted stocks and commodity prices
globally at the expense of safe-haven assets like Treasuries.

    Guy LeBas, chief fixed income strategist at Janney Capital
Management in Philadelphia, said a temporary absence of Asian
investors was also a negative factor for Treasuries.
    "What we've seen over the last several months has been
buying out of Asia and, much of Asia markets are quiet right now
for the (Lunar New Year) holiday," LeBas said.
    Another likely factor in the Treasuries sell-off was
convexity hedging by mortgage-backed securities investors
seeking to reduce risk on loans to counter the negative effects
of slower loan payments when interest rates climb. 
    "I've got to say there must be some of that going on right
now," Jones said.
    While long-dated Treasury yields have soared, the two-year
yield has been anchored by expectations the Fed will
keep policy rates near zero for years to come.
    A closely watched part of the yield curve, which measures
the gap between yields on two- and 10-year Treasury notes
, steepened to as much as 118.43 basis points, its
widest level since 2017. It was last up 8.54 basis points at
118.26 basis points. 
   The spread between five-year notes and 30-year bonds
 grew to as much as 155.35 basis points - the widest
since 2015. It was last at 152.43 basis points.
    The view that the Fed may let the economy run hot has pushed
10-year inflation expectations to their highest since 2014, with
the Treasury Inflation-Protected Securities (TIPS)
breakeven inflation rate last at 2.245%. 
    Official talks about tapering Fed bond buying, which could
begin in the second half of 2021, pose a potential downside risk
to breakeven rates, analysts at Cornerstone Macro said in a
research report on Tuesday. 
    "That could signal to investors, first that a large buyer in
the market is about to become smaller and eventually disappear,
and second that the Fed’s resolve to overshoot on inflation may
not be very strong, depending on what the outlook for inflation
will be at that time," the report said. 
    Federal Reserve Bank of Kansas City President Esther George
said on Tuesday the central bank's debate over bond purchases
will commence when it is clear the Fed is on track to meet its
inflation and employment goals.
    Ahead of the U.S. Treasury's $27 billion, 20-year bond
auction on Wednesday, the 20-year yield was last up
9.1 basis points at 1.9141%. 
    February 16 Tuesday 3:41PM New York / 2141 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.04         0.0406    0.000
 Six-month bills               0.055        0.0558    0.000
 Two-year note                 100-2/256    0.121     0.010
 Three-year note               99-178/256   0.2272    0.034
 Five-year note                99-22/256    0.5624    0.077
 Seven-year note               98-196/256   0.9338    0.094
 10-year note                  98-96/256    1.2989    0.099
 20-year bond                  91-44/256    1.9141    0.091
 30-year bond                  95-84/256    2.0853    0.081
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         9.25         0.00    
 spread                                               
 U.S. 3-year dollar swap         9.50        -0.50    
 spread                                               
 U.S. 5-year dollar swap        12.25         0.00    
 spread                                               
 U.S. 10-year dollar swap        8.75         1.50    
 spread                                               
 U.S. 30-year dollar swap      -19.25         1.25    
 spread (Reporting by Karen Pierog in Chicago, additional reporting by
Sujata Rao and Abhinav Ramnarayan in London and Kevin Buckland
in Tokyo; Editing by Chizu Nomiyama, Nick Zieminski and Jonathan
Oatis)