June 6, 2019 / 3:39 PM / 3 months ago

TREASURIES-U.S. yield curve flattens as ECB holds back on rate cut

    * ECB pledges to hold negative rates in 2020, sees risks
    * U.S. yield curve flattens, reversing prior day's
    * U.S. jobless claims suggest solid jobs market after ADP

 (Updates market action, adds quote, graphic)
    By Richard Leong
    NEW YORK, June 6 (Reuters) - The U.S. Treasury yield curve
flattened on Thursday as the European Central Bank committed to
leaving interest rates alone into the first half of 2020,
disappointing traders who had bet on a rate cut.
    The ECB also allowed banks to borrow at a rate just 10 basis
points above its minus 0.4% deposit rate provided they beat the
ECB's lending benchmarks in a new targeted longer-term
refinancing operation, or TLTRO.
    The combined ECB moves were less aggressive than what some
traders had expected, touching off selling in shorter-dated
German government debt, which in turn spilled over into shorter 
Treasury maturities, traders and analysts said.
    "In Europe, the selling came with some pricing in of an ECB
rate cut," said Subadra Rajappa, head of U.S. rates strategy at
SG Corporate & Investment Banking in New York.
    Much of the yield curve flattened, coming off its steepest
level in seven months the day before. The gap between two-year
and 10-year yields narrowed by 2.6 basis points
to 25.10 basis points.
    The U.S. curve steepening had been stoked by bets that the
Federal Reserve would ease monetary policy to combat an economic
slowdown in the United States.
    Economic worries among investors have stemmed from trade
tensions between the United States and China and other U.S.
trading partners.
    "The market is coming around to the idea that there may a
prolonged trade war and that has implications for growth and
inflation," Rajappa said. 
    This week, a number of Fed policymakers have suggested the
U.S. central bank is open to lower U.S. interest rates if the
economy deteriorates. Interest rate futures implied traders see
up to three Fed rate cuts by year-end.
     At 11:24 a.m. (1524 GMT), benchmark 10-year Treasury yields
 were 1.90 basis points lower at 2.104%.
    U.S. yields hit session lows earlier Thursday in step with
their German counterparts as investors had anticipated the ECB
hinting at cutting rates deeper into negative territory. German
10-year yields tumbled to record low of -0.240%
before retracing to -0.232%.
    On the data front, the U.S. Labor Department said first-time
filings for jobless benefits were unchanged last week, a sign of
a solid labor market.
    Traders' view of a firm jobs market was rattled on Wednesday
when payroll processor ADP's gauge of private jobs growth
decelerated to 27,000 in May, its weakest in more than nine
    The Labor Department's payrolls report for May, due on
Friday at 8:30 a.m. (1230 GMT), is seen as critical to whether
the Fed would begin lower borrowing costs.
    Analysts polled by Reuters forecast nonfarm payrolls likely
grew by 185,000 last month, down from 263,000 in April, while
the jobless rate likely held at 3.6%, the lowest since December
June 6 Thursday 11:26AM New York / 1526 GMT
 US T BONDS SEP9               154-3/32     22/32     
 10YR TNotes SEP9              127-20/256   3/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.2775       2.3287    -0.013
 Six-month bills               2.1575       2.2115    -0.038
 Two-year note                 100-135/256  1.8526    0.012
 Three-year note               100-224/256  1.8176    0.011
 Five-year note                100-170/256  1.8597    -0.003
 Seven-year note               100-224/256  1.9901    -0.010
 10-year note                  102-104/256  2.1053    -0.018
 30-year bond                  105-248/256  2.5873    -0.046
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       25.10        -2.60     
 30-year vs 5-year yield       72.60        -4.55     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         4.75         0.00    
 U.S. 3-year dollar swap         2.25         0.00    
 U.S. 5-year dollar swap         1.75         0.75    
 U.S. 10-year dollar swap       -2.00         0.25    
 U.S. 30-year dollar swap      -27.00         1.25    
 (Reporting by Richard Leong
Editing by Chizu Nomiyama and James Dalgleish)
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