December 7, 2016 / 8:21 PM / 8 months ago

TREASURIES-U.S. bond yields decline ahead of ECB meeting

* U.S. 30-year yield sets for biggest fall since late August
    * Traders await possible hints about future of ECB bond
program
    * Short-dated U.S. yields underpinned by view on Fed rate
hike

 (Updates to late U.S. market action)
    By Richard Leong
    NEW YORK, Dec 7 (Reuters) - U.S. Treasury yields fell on
Wednesday, with the 30-year yield on track for its biggest drop
in more than three months, as disappointing overseas economic
data reduced optimism about global growth ahead of a European
Central Bank meeting.
    U.S. yields decreased in step with German Bund and British
Gilt yields after October data showed German industrial output
rose less than expected and the steepest decline in British
factory production in more than four years.
     
    The dour news on foreign manufacturing came a day before the
ECB was widely expected to extend its bond purchase program,
worth over 1 trillion euros, beyond March 2017 to support the
euro zone economy.
    Traders have speculated whether ECB officials would send a
formal signal they would eventually wind down quantitative
easing. Such a move might propel bond yields around the world
higher. 
    "The market does not have a lot of clarity on what the ECB
would do tomorrow," said Jeffery Elswick, director of fixed
income at Frost Investment Advisors in San Antonio, Texas.
    The 10-year Bund yield was down 2 basis points
at 0.351 percent, and the 10-year Gilt yield was 6
basis points lower at 1.360 percent. 
    The benchmark 10-year Treasury note yield was down 5 basis
points from late Tuesday at 2.342 percent. It had reached 2.492
percent on Dec. 1, the highest since July 2015. 
    The 30-year yield was 3.020 percent, down 6
basis points, on track for the biggest one-day drop since Aug.
29 when it fell 7.9 basis points, according to Reuters data. 
    Longer-dated U.S. yields reached their highest in nearly
1-1/2 years last week on bets that Donald Trump, the Republican
President-elect, and a Republican-controlled U.S. Congress would
enact big tax cuts, boost infrastructure spending and adopt
stricter trade policies.
    "We are retracing some of those levels since the election.
The market has repositioned for fiscal stimulus," said Mike
Lorizio, senior fixed income trader at Manulife Asset Management
in Boston.
    Firm expectations that the U.S. Federal Reserve would raise
interest rates next week kept shorter-dated U.S. yields not far
below their strongest levels since April 2010.
    Two-year Treasury yield was down over 1 basis
point at 1.104 percent. 
    Interest rates futures implied traders saw a 95 percent
chance that the Fed would raise rates at its policy meeting next
Tuesday and Wednesday, CME Group's FedWatch program showed.
 
    
  Wednesday, Dec. 7, at 1507 EST (2007 GMT):
                               Price                  
 US T BONDS MAR7               151-11/32    1-2/32    
 10YR TNotes MAR7              124-212/256  0-92/256  
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills              0.4975      0.505      0.000
 Six-month bills                0.6175      0.628      0.000
 Two-year note                 99-204/256   1.1041    -0.016
 Three-year note               98-240/256   1.3703    -0.027
 Five-year note                99-200/256   1.7961    -0.045
 Seven-year note               99-228/256   2.1419    -0.046
 10-year note                  96-248/256   2.3437    -0.050
 30-year bond                  97-40/256    3.0199    -0.061
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.25         0.00    
 spread                                               
 U.S. 3-year dollar swap        14.50        -0.25    
 spread                                               
 U.S. 5-year dollar swap         0.25         0.00    
 spread                                               
 U.S. 10-year dollar swap      -15.00         0.00    
 spread                                               
 U.S. 30-year dollar swap      -54.00         0.00    
 spread                                               
 

    
 (Reporting by Richard Leong; Editing by Nick Zieminski and
Richard Chang)

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