August 6, 2019 / 7:53 PM / a month ago

TREASURIES OUTLOOK-U.S. yield curve flattens on supply, trade worries

    * Yields bounce as China fixes yuan at a bit stronger level
    * U.S. refunding kicks off with solid 3-year note sale      
   
Fed's Bullard cautions protracted risks from trade uncertainties
    * Record low European yields pressure longer-dated U.S.
yields

 (Repeats to additional subscribers)
    By Richard Leong
    NEW YORK, Aug 6 (Reuters) - The spread between U.S. shorter-
and longer-dated Treasury yields contracted on Tuesday, as
shorter-dated yields rose on $38 billion in three-year debt
supply and nagging worries about U.S.-China trade tensions
pushed down longer-dated yields.
    The modest bounce among most U.S. yields followed four
straight sessions of torrid declines as investors rushed into
U.S. government debt to shield their money from stocks and other
risky assets in response to rising trade friction between China
and the United States and bets on more stimulus from global
central banks to combat slowing business activity.
    "The yield curve is pricing in additional accommodation from
the Fed given the confluence of factors including trade," said
Steve Johnson, senior portfolio manager at SVB Asset Management
in San Francisco. "It's a more gloomy scenario."
    Risks from trade conflicts between the United States and
other countries led Fed policymakers to lower rates for the
first time since 2008 last week.
    On Tuesday, St. Louis Fed President James Bullard made the
case trade risks may stick around for a long time and said more
monetary stimulus "may be desirable."
    Interest rates futures implied traders fully positioned for
the Fed to cut rates by at least a quarter-point at its Sept.
17-18 meeting, CME Group's FedWatch program showed.
    Worries about a weakening global economy have stoked demand
for Treasuries since last week and supported bids at the $38
billion auction of three-year notes which were sold at the
lowest yield in two years.
    The Treasury Department will sell $27 billion in 10-year
notes on Wednesday and $19 billion in 30-year bonds on Thursday.
    Of the $84 billion raised at this week's refunding, the
Treasury intends to use the $57.3 billion raised to repay
bondholders and the rest to fund new spending.
    Record negative yields in Europe and Japan have also pushed
U.S. yields lower as foreign investors seek bonds that offer
income.
    "Yields in the U.S. in the global picture still look
attractive," Johnson said. "Positive yields have become
scarcer." 
    In late U.S. trading, benchmark 10-year yields were down 
0.8 basis point at 1.728%. They touched 1.672% overnight,
marking their lowest level since Oct. 5, 2016.
    The two-year yield, which is sensitive to
traders' view on Fed policy, was up 1.8 basis points at 1.601%
after hitting 1.529%, which was its lowest level since October
2017.
    The two-to-10-year part of the yield curve
had narrowed to 11 basis points before finishing at 12.5 basis
points, 1 basis point flatter on the day.
    Some selling in U.S. bonds emerged earlier Tuesday as
investor fears were held in check after China kept its currency
in a slightly stronger level a day after it let the yuan weaken
to seven to a dollar, a level not seen in a decade.
    Late Monday, U.S. Treasury Secretary Steven Mnuchin
designated China a currency manipulator, kicking off a formal
process of bilateral negotiations between the world's two
largest economies.
August 6 Tuesday 3:38PM New York / 1938 GMT
                               Price                  
 US T BONDS SEP9               161-9/32     18/32     
 10YR TNotes SEP9              129-216/256  0/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.005        2.0433    0.004
 Six-month bills               1.9475       1.9996    0.006
 Two-year note                 100-74/256   1.6011    0.018
 Three-year note               100-146/256  1.5505    0.008
 Five-year note                101-8/256    1.5341    -0.002
 Seven-year note               101-168/256  1.6231    -0.003
 10-year note                  105-204/256  1.7276    -0.008
 30-year bond                  113-100/256  2.255     -0.040
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       12.50        -1.00     
 30-year vs 5-year yield       72.00        -1.60     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         0.00         1.25    
 spread                                               
 U.S. 3-year dollar swap        -3.75         1.75    
 spread                                               
 U.S. 5-year dollar swap        -5.50         1.50    
 spread                                               
 U.S. 10-year dollar swap      -10.25         2.00    
 spread                                               
 U.S. 30-year dollar swap      -39.25         4.00    
 spread                                               
 
    

    
 (Reporting by Richard Leong; Editing by Steve Orlofsky and
Cynthia Osterman)
  
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