August 10, 2018 / 7:52 PM / a month ago

TREASURIES-U.S. bond market rallies on fears about Turkey

    * U.S. Treasuries score best day in over two months
    * U.S. core CPI comes in stronger than forecast in July
    * Trump authorizes higher tariffs on Turkish steel, aluminum
    * Overall solid August refunding underpins Treasuries demand

 (Recasts, updates market action)
    By Richard Leong
    NEW YORK, Aug 10 (Reuters) - The U.S. Treasury debt market
rang up its best day in more than two months as investors
scooped up low-risk government debt on anxiety about Turkey's
financial problems spreading to other emerging economies and
lenders exposed to the sector.
    Bond yields fell to near three-week lows with the benchmark
10-year yield recording its biggest one-day drop since late May
as U.S. President Donald Trump escalated tension with Turkey, a
NATO ally, by slapping higher tariffs on Turkish steel and
aluminum imports, a move that put further pressure on the
country's currency.
    "Our relations with Turkey are not good at this time," Trump
said on Twitter.
    In response, Turkey's finance minister Berat Albayrak on
Friday rolled out the government's new economic plan, promising
central bank independence and tighter budget discipline, but
giving few details to reassure investors and stem a currency
crisis.
    Rattled traders dumped more lira on Friday for its
biggest single-day loss since Turkey adopted a floating-currency
regime in 2001.
    "Clearly the currency took a beating. That had to raise
eyebrows," said Jerry Paul, senior vice president of fixed
income at ICON Advisers in Denver. "On top of that, you had
Trump piling on with the tariff stuff. People say, 'I just want
to be in a safe asset.'"
    The yield on benchmark 10-year Treasury notes
touched 2.855 percent, its lowest in almost three weeks. At 3:00
p.m. (1800 GMT), it was down over 8 basis points at 2.853
percent for its steepest one-day decline since slumping on a
political crisis in Italy in late May.
    Wall Street and other major stock markets also fell.

    Friday's safe-haven bids for Treasuries added to earlier
buying following a solid August government debt refunding where
the government raised nearly $40 billion of fresh cash for
spending and debt servicing.
    "The latest auction cycle went pretty well. Demand seems to
be there. It's comforting for the market," said Larry Milstein,
head of government and agency trading at R.W. Pressprich & Co.
in New York. 
    Friday's drop in U.S. bond yields was limited after data
showed underlying domestic inflation grew a tad more than
forecast in July, reducing bets price growth would weaken in
coming months, analysts said.
    The core rate of the consumer price index (CPI), which
excludes volatile food and energy prices, increased 0.2 percent
in July, lifting its annual gain to 2.4 percent for its biggest
gain since September 2008, the Labor Department said on
Friday.
   Friday, Aug. 10 at 1507 EDT (1907 GMT):
                               Price                  
 US T BONDS SEP8               144-19/32    42/32     
 10YR TNotes SEP8              120-92/256   21/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.0075       2.0453    -0.006
 Six-month bills               2.1675       2.2214    -0.014
 Two-year note                 100-14/256   2.596     -0.057
 Three-year note               100-58/256   2.6709    -0.071
 Five-year note                100-22/256   2.7312    -0.082
 Seven-year note               100-112/256  2.8053    -0.085
 10-year note                  100-36/256   2.8587    -0.076
 30-year bond                  99-160/256   3.0191    -0.066
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       26.10        -1.60     
 30-year vs 5-year yield       28.70        2.35      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.75        -0.50    
 spread                                               
 U.S. 3-year dollar swap        16.25         0.00    
 spread                                               
 U.S. 5-year dollar swap        13.00         0.75    
 spread                                               
 U.S. 10-year dollar swap        5.75         0.25    
 spread                                               
 U.S. 30-year dollar swap       -7.00        -0.25    
 spread                                               
 
    

    
 (Reporting by Richard Leong
Editing by Andrea Ricci)
  
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