September 5, 2017 / 4:42 PM / a year ago

TREASURIES-U.S. bond market rallies on North Korea jitters

    * October T-bill yields elevated on debt ceiling concerns
    * Companies seen selling $35 bln-$40 bln in high-grade debt
    * Fed should be cautious as inflation stays weak -Brainard

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Sept 5 (Reuters) - The U.S. Treasuries market
rallied on Tuesday with the 10-year yield hitting a near
10-month low as worries about further nuclear tests by North
Korea spurred safe-haven demand for U.S. government debt.

    Yields on Treasury bills due in October remained elevated as
investors await developments on whether U.S. lawmakers would
reach a deal to increase the federal debt ceiling in a bid to
avert a default.
    "Right now the safe-haven bid is clearly in place as North
Korea did a 'H-bomb' test over the weekend," said Larry
Milstein, head of government and agency trading at R.W.
Pressprich & Co in New York.
    On Sunday, North Korea said it tested an advanced hydrogen
bomb for a long-range missile, prompting global condemnation and
a U.S. warning of a "massive" military response if it or its
allies were threatened.
    Traders and analysts said the decline in U.S. yields was
partly offset by hedging activity tied to an expected $35
billion to $40 billion worth of investment-grade corporate bond
supply to hit this week according to IFR, a Thomson Reuters
    Meanwhile, Federal Reserve Governor Lael Brainard said the
U.S. central bank should be cautious about raising interest
rates further as inflation has been stuck below its 2 percent
    On the other hand, Brainard suggested she was prepared to
back the announcement of the Fed's plan to announce a reduction
of its $4.2 trillion portfolio of bond holdings at its upcoming
Sept. 19-20 policy meeting. 
    At 12:19 p.m. (1619 GMT), the yield on benchmark 10-year
Treasury notes was down 8 basis points at 2.082
percent. Earlier on Tuesday it hit 2.079 percent, which was its
lowest level since Nov. 10.
    U.S. financial markets were closed on Monday for the Labor
Day holiday.
    The yield on T-bills due on Oct. 5, the first
debt issue that the government might skip repaying if the debt
ceiling is not raised before a late September deadline, was at
1.205 percent, down 4 basis points from late on Friday.
    Top Republicans and Democrats have hinted they would at
least arrive at a temporary agreement to fund the government and
increase the federal borrowing limit to prevent a shutdown and a
    "All the top leaders in Congress from both parties seem to
say the debt ceiling is not an issue," said Mike Lorizio, head
of Treasuries trading at Manulife Asset Management in Boston.
  September 5 Tuesday 12:22PM New York / 1622 GMT
 US T BONDS DEC7               156-23/32    1-17/32   
 10YR TNotes DEC7              127-84/256   0-168/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.99         1.0061    -0.005
 Six-month bills               1.0825       1.1034    0.007
 Two-year note                 99-232/256   1.298     -0.048
 Three-year note               100-74/256   1.3992    -0.060
 Five-year note                99-216/256   1.6578    -0.075
 Seven-year note               99-202/256   1.9074    -0.079
 10-year note                  101-128/256  2.0821    -0.075
 30-year bond                  100-252/256  2.7018    -0.066
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        22.00         1.50    
 U.S. 3-year dollar swap        19.25         1.25    
 U.S. 5-year dollar swap         6.50         0.75    
 U.S. 10-year dollar swap       -5.00         0.25    
 U.S. 30-year dollar swap      -34.50         0.25    

 (Reporting by Richard Leong; Editing by Meredith Mazzilli and
Paul Simao)
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