August 1, 2019 / 8:39 PM / 4 months ago

TREASURIES OUTLOOK-U.S. bond market rallies on Trump's tariff threat

    * U.S. manufacturing growth slows to near 3-year low - ISM
    * Futures imply traders now see two more rate cuts by
year-end
    * Record low euro zone yields pull down U.S. yields 

 (Repeats to additional subscribers)
    By Richard Leong
    NEW YORK, Aug 1 (Reuters) - The U.S. Treasury market rallied
on Thursday with 10-year yields tumbling to their lowest levels
since November 2016, as U.S. President Donald Trump's threat to
slap more duties on Chinese goods touched off a stampede for
safe-haven government bonds.
    Most Treasury yields recorded their steepest one-day drop
since May 29, 2018 when investors flocked into Treasuries
stemming from a political crisis in Italy. Treasury prices
ripped higher, coming off a lackluster July when they recorded a
0.118% loss.
    Trump's latest move to pressure Beijing for a trade deal
intensified appetite for Treasuries, which was already
underpinned by worries about a global economy that is wobbling
due to the U.S.-China trade conflict.
    The Institute for Supply Management said earlier Thursday
its index of national factory activity fell to 51.2 last month,
the lowest reading since August 2016.
    "Trump's threat of more tariffs is going to be a continued
negative factor for the global economy. Treasuries should be
able to maintain this support," said John Canavan, lead analyst
at Oxford Economics in New York.
    A chaotic day in financial markets may also set the stage
the Federal Reserve to enter into a protracted easing cycle
rather than a "a mid-cycle adjustment to policy" that Fed
Chairman Jerome Powell characterized on Wednesday after
policy-makers lowered interest rates for the first time since
2008. 
    The futures market implied traders see a 73% chance the Fed
would lower rates again at its Sept. 17-18 policy meeting, up
from 51% late on Wednesday, according to CME Group's FedWatch
program.
    It is unclear whether even a robust payrolls report for July
due at 8:30 a.m. (1230 GMT) on Friday would cool the blistering
demand for Treasuries, analysts said.
    Record low yields in the euro zone, where roughly $13
trillion worth of government debt are trading with negative
yields, will keep downward pressure on U.S. yields, analysts
said.
    In late U.S. trading, yields on benchmark 10-year Treasury
notes were 12.60 basis points lower at 1.895% which
was their steepest single-day drop since May 29, 2018.
    Ten-year yields touched 1.876% at one point after Trump's
tweet on tariffs, marking their lowest level since Nov. 9, 2016
- the day after Trump's surprise presidential win.
    The 30-year bond surged 2 points in price for a
yield of 2.438%, down 8.80 basis points on the day. Thirty-year
yields hit 2.422%, the lowest since October 2016.
August 1 Thursday 4:04PM New York / 2004 GMT
                               Price                  
 US T BONDS SEP9               157-24/32    69/32     
 10YR TNotes SEP9              128-168/256  40/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.04         2.0846    0.000
 Six-month bills               2.0125       2.0613    -0.035
 Two-year note                 100          1.75      -0.138
 Three-year note               100-40/256   1.6954    -0.153
 Five-year note                100-72/256   1.691     -0.154
 Seven-year note               100-168/256  1.7748    -0.153
 10-year note                  104-72/256   1.8935    -0.127
 30-year bond                  109-64/256   2.4363    -0.090
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       14.00        -0.05     
 30-year vs 5-year yield       74.40        5.00      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.75        -1.25    
 spread                                               
 U.S. 3-year dollar swap         0.00        -0.25    
 spread                                               
 U.S. 5-year dollar swap        -2.75         0.25    
 spread                                               
 U.S. 10-year dollar swap       -8.75        -1.25    
 spread                                               
 U.S. 30-year dollar swap      -38.25        -2.50    
 spread                                               
 
    

    
 (Reporting by Richard Leong; Editing by Bernadette Baum, Dan
Grebler and Tom Brown)
  
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