August 2, 2019 / 7:51 PM / 4 months ago

TREASURIES-U.S. 10-year yields post biggest weekly drop in seven years

    * U.S. payrolls grow 164,000 in July, slower than June
    * Renewed U.S.-China trade tensions keep bond yields low
    * Futures suggest traders see a U.S. rate cut in September 

 (Updates market action, adds graphic)
    By Richard Leong
    NEW YORK, Aug 2 (Reuters) - U.S. Treasury prices rose on
Friday, with 10-year yields posting their steepest weekly drop
since 2012, as fears about the escalating U.S.-China trade war
offset reassuring U.S. labor market data.
    Financial markets fell for a second day in a row after U.S.
President Donald Trump on Thursday threatened new tariffs on
Chinese goods in a bid to move Beijing toward a trade deal. The
turmoil has also stoked expectations that the Federal Reserve
would lower rates in September and possibly December. 
    Investors have piled into Treasuries as a safe haven,
pushing benchmark 10-year yields to their lowest since Nov. 9,
2016, the day after Trump was elected.
    "The market is going to lead the Fed to lower rates because
of trade frictions. Domestic data are not going to do it," said
Robert Tipp, chief investment strategist at PGIM Fixed Income in
Newark, New Jersey.
    Wall Street's main indexes slumped on Friday to one-month
lows a day after Trump's threat to impose 10% tariffs on $300
billion worth of Chinese imports, starting Sept. 1.
    As stocks tumbled, investors favored low-risk Treasuries,
the Japanese yen and other perceived safe assets.
    In late U.S. trading, benchmark 10-year Treasury notes
 yielded 1.859%, down 3.30 basis points from late on
Thursday. The yield fell to 1.832% earlier Friday, the lowest
since November 2016.
    For the week, 10-year yields decreased nearly 23 basis
points, in the biggest fall since a near 29 basis-point drop in
the week ended June 1, 2012 during the height of the European
debt crisis, according to Refinitiv data.
    The trade war has hit manufacturers around the world. U.S.
factory growth slowed in July to its weakest level in nearly
three years, but the U.S. labor market has been resilient.
    The Labor Department said nonfarm payrolls increased by
164,000 in July, fewer than a revised 193,000 gain the previous
month but in line with economists' expectations. Average hourly
earnings rose 0.3%, matching the June increase and beating the
0.2% gain analysts forecast.
    The Fed lowered rates on Wednesday for the first time since
2008 to counter risks from trade conflicts and sluggish U.S.
    Interest rates futures implied traders see a 98% chance the
Fed would lower rates at its Sept. 17-18 policy meeting, up from
85% late on Thursday, according to CME Group's FedWatch program.
    The yield curve also flattened. 
    The inverted gap between three-month bill rates
and 10-year yields grew to 20 basis points from 19
basis points. The inversion between the two maturities, which
began May 23, is seen as an omen of a recession.    
August 2 Friday 3:37PM New York / 1937 GMT
 US T BONDS SEP9               158-19/32    29/32     
 10YR TNotes SEP9              128-212/256  5/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.015        2.0586    -0.026
 Six-month bills               1.9675       2.0144    -0.032
 Two-year note                 100-15/256   1.7198    -0.002
 Three-year note               100-50/256   1.6816    0.008
 Five-year note                100-94/256   1.6729    -0.003
 Seven-year note               100-204/256  1.7533    -0.016
 10-year note                  104-152/256  1.8588    -0.033
 30-year bond                  110-64/256   2.3917    -0.049
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       13.70        -2.00     
 30-year vs 5-year yield       71.70        -4.05     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         2.50        -1.75    
 U.S. 3-year dollar swap        -1.75        -2.50    
 U.S. 5-year dollar swap        -3.75        -1.50    
 U.S. 10-year dollar swap       -8.25         0.25    
 U.S. 30-year dollar swap      -38.25         0.00    

 (Reporting by Richard Leong; Editing by Bernadette Baum, Dan
Grebler, David Gregorio and Richard Chang)
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