July 1, 2019 / 4:32 PM / 3 months ago

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

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

 (Updates market action, adds graphics)
    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
    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.
    "What is a truce for now represents to us more sentiment
than anything else," said Gregory Faranello, head of U.S. rates
at AmeriVet Securities. 
    At 12:14 a.m. (1614 GMT), benchmark 10-year Treasury yields
 were up 3.30 basis point at 2.033%, while two-year
yields were 5.60 basis points higher at 1.797%.
    With U.S.-China trade talks seemingly back on track, there
were lowered expectations the Federal Reserve would embark on an
aggressive half a 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
level since October 2016, but it was less severe than what
analysts had forecast.
    "The market wants a rate cut," Faranello said. "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 next month, but they rolled back their bets on a 50
basis-point cut to 18% from 32% late on Friday, according to CME
Group's FedWatch program.
 July 1 Monday 12:13PM EDT/ 1613 GMT
 US T BONDS SEP9               155-6/32     -0-13/32   
 10YR TNotes SEP9              127-176/256  -0-72/256  
                               Price        Current    Net
                                            Yield %    Change
 Three-month bills             2.08         2.1252     0.025
 Six-month bills               2.05         2.1054     0.010
 Two-year note                 99-171/256   1.7952     0.054
 Three-year note               100          1.7499     0.052
 Five-year note                99-198/256   1.7976     0.041
 Seven-year note               99-208/256   1.9038     0.036
 10-year note                  103-20/256   2.0291     0.029
 30-year bond                  106-200/256  2.5492     0.023
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap         4.75        -0.50     
 U.S. 3-year dollar swap         3.00        -0.25     
 U.S. 5-year dollar swap        -0.25         0.50     
 U.S. 10-year dollar swap       -4.25         0.50     
 U.S. 30-year dollar swap      -31.25         0.75     

 (Reporting by Richard Leong; editing by Jonathan Oatis and
Diane Craft)
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