December 3, 2018 / 11:38 PM / 5 days ago

CORRECTED-TREASURIES-Yield curve inverts for first time in a decade, sounding alarm

 (Corrects paragraphs 1 and 8 to read 2-year yields rose above
the 5-year's, not fell below)
    * U.S., China agree to hold off on new tariffs
    * Three-year vs five-year and two-year vs five-year yield
curve
sections invert
    * Bond market to close Wednesday to mourn President Bush

    By Karen Brettell
    NEW YORK, Dec 3 (Reuters) - Benchmark U.S. Treasury yields
fell back below 3 percent on Monday, and yields on two
maturities at the front of the curve rose above longer-dated
5-year notes for the first time in more than a decade, as risk
appetite sparked by a U.S.-China trade agreement faded.
    Yields had risen earlier after a deal between the United
States and China to hold off on new tariffs boosted stocks and
reduced demand for safe haven U.S. debt. 
    Stocks pared some of their big early gains and Treasury
yields fell, however, as investors focused on continuing trade
tensions between the countries.
    ”Some of the exuberance is fading off a little bit as people
digest the news and understand that we’re still a ways away from
having any real deal in place,” said Zach Griffiths, an interest
rate strategist at Wells Fargo in Charlotte, North Carolina.
    Benchmark 10-year notes             gained 13/32 in price to
yield 2.966 percent the lowest since Sept. 13.
    The yield curve between two-year and 10-year notes
               flattened to 14.5 basis points, the flattest in
over a decade.
    The curve between three-year and five-year notes
              inverted to a low of negative 1.2 basis points for
the first time since 2007. It was the first part of the Treasury
yield curve to invert since the financial crisis, excluding very
short-dated debt.
    Late in the day, the two-year yield also rose above the
five-year's, with the gap at negative 0.5 basis point heading
into the evening.
    The highly watched two-year, 10-year part of the yield curve
is likely to follow suit, said Ian Lyngen, head of U.S. rates
strategy at BMO Capital Markets in New York.
    The two-year, 10-year yield curve is a key focus for
investors as an inversion is seen as predictor of a U.S.
recession.
    The yield curve has flattened as continuing interest rate
hikes send short-dated yields higher, while longer-dated
Treasuries are supported by tepid inflation and slowing global
growth.
    The Federal Reserve is widely expected to raise rates at its
meeting on Dec. 18-19. However, interest rate futures traders
are now pricing in only one rate increase during 2019, below Fed
projections of three, according to the CME Group’s FedWatch
Tool.
    Fed Chairman Jerome Powell was scheduled to testify on
Wednesday to a congressional Joint Economic Committee, but the
hearing was postponed because of a national day of mourning for
U.S. President George H.W. Bush, who died on Friday.
            
    No new date for the rescheduled testimony has been
announced.             
    Stock and bond markets will be closed on Wednesday.

 (Reporting by Karen Brettell;
Additional reporting by Dan Burns; Editing by Lisa Shumaker)
  
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