July 25, 2018 / 7:00 PM / 21 days ago

TREASURIES-Prices gain modestly as Trump meets EU on trade

(Recasts with Trump meeting, adds auction result, updates prices)

* Analysts fear tariffs will hurt economy

* BOJ seen unlikely to alter stimulus next week

* Treasury sells $36 billion in five-year notes

By Karen Brettell

NEW YORK, July 25 (Reuters) - U.S. Treasury prices were slightly higher on the day on Wednesday as U.S. President Donald Trump met with European Commission President Jean-Claude Juncker to discuss trade agreements.

Trade experts expressed hope that the meeting could start a process for exploring how the United States, the European Union and other allies begin to reduce automotive tariffs - and deter Trump from imposing a 25 percent tariff on imported cars and auto parts.

Tariffs are seen as a threat to economic growth as companies face rising costs.

“The question is do (higher costs) get passed through to consumers and impact inflation? We think with the global market a lot of that will not be able to be passed through and ends up having a bigger impact on growth than inflation,” said Justin Hoogendoorn, head of fixed income strategy and analytics at Piper Jaffray in Chicago.

Slower growth would be a positive for Treasuries as it would likely slow interest rate increases.

Treasury prices gained earlier on Wednesday, in line with Japanese government bonds, as investors doubted that the Bank of Japan will change its stimulus program when it meets next week.

“The consensus is evolving that most don’t expect an actual change in policy in July,” said Brian Daingerfield, a macro strategist at NatWest Markets in Stamford, Connecticut.

However, “the market is adjusting to the idea that a conversation about changes is starting a lot sooner than we thought,” he added.

Treasury yields had risen and the yield curve had steepened following a Reuters report on Friday that the Japanese central bank was discussing modifying its easing program.

Benchmark 10-year notes gained 3/32 in price to yield 2.941 percent, down from 2.950 percent on Tuesday.

The yield curve between two-year and 10-year notes flattened to 28 basis points, from a high of 33 basis points on Tuesday, but held above the 23 basis point area reached last week, which was the flattest level in a decade.

The United States sold $36 billion in five-year notes to strong demand, the second sale of $101 billion in coupon-bearing supply this week.

A $35 billion sale of two-year notes on Tuesday was also well received.

The government will sell $30 billion in seven-year notes on Thursday. (Reporting by Karen Brettell; Editing by Will Dunham and Dan Grebler) )

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