July 31, 2019 / 8:52 PM / 2 months ago

TREASURIES-U.S. yield curve flattens as Fed's Powell cools rate-cut bets

    * Fed cuts rates, ends balance sheet normalization early
    * German 10-year yields hit record lows   
    * Chicago PMI hits lowest level since December 2015
    * U.S. to sell $84 bln in debt next week at refunding

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, July 31 (Reuters) - The margin between U.S. short-
and long-dated yields collapsed to its lowest level in over four
months on Wednesday, as Federal Reserve Chairman Jerome Powell
tempered bets on more rate cuts after the central bank made the
first cut since 2008.
    Shorter-dated yields rose as traders scaled back positions
on future rate cuts, while longer-dated yields fell on the Fed's
muted inflation outlook and the halting of its balance sheet
normalization two months early.
    "The short-end was not doing better because Powell said it's
not the start of a cycle of rate cuts," said Mary Ann Hurley,
vice president of fixed income at D.A. Davidson. 
    Powell, speaking in a news conference after a two-day policy
meeting, characterized the rate cut as "a mid-cycle adjustment
to policy," raising doubts steep rate cuts are on the way.
Earlier, he and other policy-makers decided to lower rates by a
quarter of a percentage point.
    Traders still see one more rate decrease this year, perhaps
coming as early as September. Powell's remarks, however, slashed
expectations the Fed is prepared to lower more than twice into
next year, according to CME Group's FedWatch tool that assesses
interest rates futures.
     In late U.S. trading, benchmark 10-year Treasury yields
 were down 5.50 basis points at 2.006%.
    Two-year yields, which are sensitive to traders'
views on changes in Fed policy, were up 1.80 basis points at
1.866% after hitting a two-month high at 1.968%.
    The two-year and 10-year part of the yield curve had
narrowed to 10 basis points, the tightest since March 22, before
widening back to 13.8 basis points.
    U.S. yields were also pulled lower by their German
counterparts as traders anticipate the European Central Bank is
prepared to embark on more stimulus to foster business activity
and inflation across the euro zone.  
    Moreover, European yields decreased on worries about a
possible no-deal Brexit.
    Ten-year Bund yields hit -0.443%, a record low. 
       
    While the U.S. economy is in the middle of its longest-ever
expansion, cracks are showing in the manufacturing sector and
the inability for inflation to hit the Fed's 2% goal. 
    The Chicago Purchasing Management Index, also known as the
Chicago Business Barometer, fell to 44.4 this month, the lowest
level since December 2015 from 49.7 in June.
    The poor regional factory figure was offset by a mildly
better-than-expected reading on domestic private employment in
July from payroll processor ADP.
    On the supply front, the U.S. Treasury Department said it
will sell as expected $84 billion in coupon-bearing debt next
week for its August refunding. It will repay $57.3 billion of
proceeds to bondholders and raise $26.7 billion in new cash.

        
July 31 Wednesday 4:37PM New York / 2037 GMT
                               Price                  
 US T BONDS SEP9               155-29/32    41/32     
 10YR TNotes SEP9              127-156/256  9/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.0275       2.0719    -0.023
 Six-month bills               2.025        2.0744    -0.014
 Two-year note                 99-198/256   1.8661    0.018
 Three-year note               99-204/256   1.8208    0.006
 Five-year note                99-170/256   1.8206    -0.023
 Seven-year note               99-202/256   1.9073    -0.034
 10-year note                  103-64/256   2.0075    -0.054
 30-year bond                  107-104/256  2.5199    -0.066
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       13.80        -7.05     
 30-year vs 5-year yield       69.70        -3.75     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         3.75         1.00    
 spread                                               
 U.S. 3-year dollar swap         0.50         0.75    
 spread                                               
 U.S. 5-year dollar swap        -3.00         0.50    
 spread                                               
 U.S. 10-year dollar swap       -7.50         1.25    
 spread                                               
 U.S. 30-year dollar swap      -36.75         0.75    
 spread                                               
 
    

 (Reporting by Richard Leong
Editing by Tom Brown and Chris Reese)
  
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