July 1, 2019 / 7:42 PM / in 19 days

TREASURIES-U.S.-China's trade truce boosts U.S. bond yields

    * U.S. factory growth slows to weakest in over 2-1/2 years
-ISM
    * U.S.-China talks reset eases pressure for bold Fed rate
cut
    * Treasuries post strongest first half in three years

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, July 1 (Reuters) - U.S. Treasury yields rose on
Monday as China and the United States' agreement to restart
trade talks caused investors to pare their safe-haven holdings
of bonds, although the selling was limited by worries about
global economic growth.
    U.S. government debt produced a 5.18% total return in the
first six months of 2019, marking its strongest first half in
three years, according to an index compiled by Barclays and
Bloomberg.
    Investors had piled into U.S. government debt and other
perceived low-risk assets on fears about a further escalation in
trade tensions between the world's biggest economies after a G20
summit in Osaka, Japan this weekend.
    But Washington and Beijing agreed to renegotiate after U.S.
President Donald Trump offered concessions, including no new
tariffs and an easing of restrictions on tech company Huawei,
while China approved making unspecified new purchases of U.S.
farm products.
    "The main driver today was the easing of trade tension, but
there's a surprisingly lack of details," said Mary Ann Hurley,
vice president of fixed income at D.A. Davidson in Seattle.
"This may go on for a long time. In my opinion, I don't think
that's positive for business."
    Still Wall Street rallied on the agreement between Trump and
Chinese President Xi Jinping, with the S&P 500 hitting a
record high.   
    In late U.S. trading, benchmark 10-year U.S. Treasury note
yields were up 3.10 basis points at 2.031%. They
fell 14 basis points in June and touched 1.974%, which was their
lowest since November 2016.
    With U.S.-China trade talks seemingly back on track, there
were lowered expectations the Federal Reserve would embark on an
aggressive half-percentage-point rate cut at its next policy
meeting on July 30-31, though traders still anticipate a more
modest quarter-point decrease, analysts said.
    The view on a possible Fed rate cut was supported by
disappointing factory data in Asia and Europe.
    U.S. manufacturing growth decelerated in June to its weakest
since October 2016, but the fall was less severe than analysts
had forecast.
    "The market wants a rate cut," said Gregory Faranello, head
of U.S. rates at AmeriVet Securities in New York. "Bottom line,
this is what we are priced for and the Fed certainly has a role
in current market expectations."
    Interest rate futures implied traders fully expect a rate
cut at the Fed's next meeting, but they rolled back their bets
on a 50 basis-point cut to 20% from 32% late on Friday,
according to CME Group's FedWatch program.
  Monday, July 1, at 1530 EDT (1930 GMT):
                               Price                   
 US T BONDS SEP9               155-2/32     -0-17/32   
 10YR TNotes SEP9              127-180/256  -0-68/256  
                               Price        Current    Net
                                            Yield %    Change
                                                       (bps)
 Three-month bills             2.0775       2.1227     0.023
 Six-month bills               2.045        2.1002     0.005
 Two-year note                 99-174/256   1.7892     0.048
 Three-year note               100-6/256    1.7417     0.044
 Five-year note                99-202/256   1.7943     0.037
 Seven-year note               99-212/256   1.9014     0.033
 10-year note                  103-16/256   2.0309     0.031
 30-year bond                  106-168/256  2.555      0.029
                                                       
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
                                            Change     
                                            (bps)      
 U.S. 2-year dollar swap         5.25         0.00     
 spread                                                
 U.S. 3-year dollar swap         3.50         0.25     
 spread                                                
 U.S. 5-year dollar swap        -0.50         0.25     
 spread                                                
 U.S. 10-year dollar swap       -4.50         0.25     
 spread                                                
 U.S. 30-year dollar swap      -31.75         0.25     
 spread                                                
 
    
 (Reporting by Richard Leong
Editing by Diane Craft and James Dalgleish)
  
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