July 21, 2017 / 6:56 PM / 4 months ago

TREASURIES-U.S. yields fall on euro's rise, stock losses

    * European yields fall as euro hits near two-year peak vs
dollar
    * Wall Street's decline stoke safe-haven bids for bonds
    * U.S. one-month rate volatility at record low -BAML data
    * October T-bill rates jump on worries about debt ceiling

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, July 21 (Reuters) - U.S. Treasury yields fell on
Friday, with benchmark yields hitting three-week lows, as the
euro reached a near two-year high against dollar, raising doubts
whether the European Central Bank would scale back its bond
purchases later in 2017.
    Wall Street stock indexes retreated from record peaks
following weak results from General Electric Co, kindling
safe-haven demand for low-risk government debt.
    Trading volume was light in the absence of major U.S.
economic data and some caution before next week's Federal
Reserve policy meeting.
    The euro's surge, if sustained, would hurt European
exporters and possibly force ECB policymakers to delay any plans
to reduce quantitative easing.
    "This is a directionality with the euro. The U.S. and Bunds
spread is moving on that after the ECB meeting," Subadra
Rajappa, head of U.S. rates strategy at SG Corporate &
Investment Banking in New York.
    On Thursday, the ECB stuck to its ultra-loose policy stance
as Europe's inflation remained below 2 percent, but traders
perceived ECB President Mario Draghi's comments at his news
conference as supportive to build bullish bets on the euro
.
    The euro rose to $1.1677 earlier on Friday, the strongest
since Aug. 24, 2015, while German 10-year yields
traded as low as 0.496 percent, a two-week trough, Reuters data
showed.
    The benchmark 10-year Treasury yield was down
more than 3 basis points at 2.230 percent after hitting a
three-week low of 2.225 percent.
    The Dow Jones industrial average and S&P 500 were down 0.2
percent and 0.1 percent, respectively.
    Among Treasury bills, interest rates on T-bills due in
October rose to their highest since October 2008 on risk of a
default if Congress fails to raise the country's debt limit.

    The Fed is widely expected to leave key interest rates 
unchanged in the wake of a softening in domestic inflation.

    "You have four CPI (consumer price index) prints which were
not very good. Why are we concerned about inflation?" said Jim
Caron, portfolio manager at Morgan Stanley Investment Management
in New York.
    Caron and some analysts expect inflation to rebound in the
second half of 2017 on positive year-over-year comparisons and a
further tightening in the labor market.
    An expected pause in the Fed holding U.S. rates has partly
led to a decline in interest rate volatility.
    An index compiled by Bank of America Merrill Lynch on
one-month volatility on Treasury yields has fallen
in the past two weeks, recording an all-time low of 46.999 on
Thursday.
    
    Friday, July 21 at 1447 EDT (1847 GMT):
                               Price                  
 US T BONDS SEP7               154-26/32    0-24/32   
 10YR TNotes SEP7              126-80/256   0-64/256  
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.1475       1.1667    0.023
 Six-month bills               1.09         1.1111    -0.005
 Two-year note                 99-210/256   1.3443    -0.016
 Three-year note               100-4/256    1.4946    -0.018
 Five-year note                99-196/256   1.7998    -0.023
 Seven-year note               99-176/256   2.0485    -0.030
 10-year note                  101-64/256   2.2322    -0.034
 30-year bond                  104          2.8011    -0.035
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        24.50         0.25    
 spread                                               
 U.S. 3-year dollar swap        20.50         0.50    
 spread                                               
 U.S. 5-year dollar swap         7.75         0.00    
 spread                                               
 U.S. 10-year dollar swap       -3.50         0.00    
 spread                                               
 U.S. 30-year dollar swap      -31.00        -0.25    
 spread                                               
 
      

    
 (Reporting by Richard Leong; Editing by Meredith Mazzilli and
Richard Chang)
  

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