August 2, 2019 / 5:41 PM / 3 months ago

TREASURIES-U.S. yield curve flattens as trade worries offset jobs data

    * U.S. payrolls grow 164,000 in July, slower than June
    * Renewed U.S.-China trade tensions keep bond yields low
    * Futures suggest traders see a U.S. rate cut in September 

 (New throughout, updates market action, comments, adds
    By Richard Leong
    NEW YORK, Aug 2 (Reuters) - The spread between short- and
long-dated U.S. Treasuries yields contracted on Friday as fears
about the escalating trade war between Washington and Beijing
offset reassuring data about the U.S. labor market.
    Trade worries roiled financial markets a day after U.S.
President Donald Trump threatened new tariffs on Chinese goods
in a bid to move Beijing toward a trade deal. The turmoil has
also stoked expectations that the Federal Reserve would lower
rates in September and possibly December. 
    Investors have piled into Treasuries as a safe haven,
pushing benchmark 10-year yields to their lowest levels since
Nov. 9, 2016, the day after Trump was elected. 
    The yield curve also flattened. At 1:08 p.m. EDT (1708 GMT),
the spread between two-year and 10-year Treasury yields
 narrowed 1.3 basis points to 14.4 basis points
after being as tight as 10.5 basis points during the session.
    The inverted gap between three-month bill rates
and 10-year yields grew to 20 basis points from 19
basis points. The inversion between the two maturities, which
began May 23, is seen as an omen of a recession.
    The Fed lowered rates on Wednesday for the first time since
2008 in a bid to counter risks from trade conflicts and sluggish
U.S. inflation.
    "The market is going to lead the Fed to lower rates because
of trade frictions. Domestic data are not going to do it," said
Robert Tipp, chief investment strategist at PGIM Fixed Income in
Newark, New Jersey.
    Wall Street's main indexes slumped on Friday to one-month
lows a day after Trump's threat to impose 10% tariffs on $300
billion worth of Chinese imports, starting Sept. 1.
    The trade war has hit manufacturers around the world. U.S.
factory growth slowed in July to its weakest level in nearly
three years, but the U.S. labor market has been resilient.
    The Labor Department said nonfarm payrolls increased by
164,000 in July, fewer than a revised 193,000 gain the previous
month but in line with economists' expectations. Average hourly
earnings rose 0.3%, matching the June increase and beating the
0.2% gain analysts forecast.
    Yields on benchmark 10-year Treasury notes were
1.866%, down 2.60 basis points from late on Thursday. They fell
to 1.832% earlier Friday, the lowest since November 2016.
    Interest rates futures implied traders see a 98% chance the
Fed would lower rates at its Sept. 17-18 policy meeting, up from
85% late on Thursday, according to CME Group's FedWatch program.
August 2 Friday 1:12PM New York / 1712 GMT
 US T BONDS SEP9               158-11/32    21/32     
 10YR TNotes SEP9              128-204/256  4/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.0225       2.0663    -0.019
 Six-month bills               1.9575       2.0041    -0.042
 Two-year note                 100-15/256   1.7198    -0.002
 Three-year note               100-54/256   1.6761    0.002
 Five-year note                100-98/256   1.6697    -0.006
 Seven-year note               100-200/256  1.7557    -0.013
 10-year note                  104-136/256  1.8657    -0.026
 30-year bond                  109-244/256  2.4049    -0.036
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       14.20        -1.30     
 30-year vs 5-year yield       73.40        -2.40     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         2.25        -2.00    
 U.S. 3-year dollar swap        -1.50        -2.25    
 U.S. 5-year dollar swap        -3.50        -1.25    
 U.S. 10-year dollar swap       -8.50         0.00    
 U.S. 30-year dollar swap      -38.50        -0.25    
 (Reporting by Richard Leong; Editing by Bernadette Baum, Dan
Grebler and David Gregorio)
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