November 7, 2018 / 10:01 PM / 7 days ago

TREASURIES-U.S. yield curve flattens on divided control of U.S. Congress

    * Divided Congress seen capping federal deficit, borrowing
    * Record 30-year auction draws weakest demand in over 9
years
    * Traders await possible rate-hike clues from Federal
Reserve
    * "Stripping" of Treasuries hits all-time high in October

 (Updates with market action after Wall Street close)
    By Richard Leong
    NEW YORK, Nov 7 (Reuters) - The gap between short- and
longer-dated U.S. Treasury yields shrank on Wednesday after the
U.S. midterm elections delivered a divided Congress, leaving
investors to assess the impact on government spending and
borrowing in the coming year.
    Treasury yields ended higher in a late market selloff as a 2
percent rally in Wall Street stocks reduced safe-haven bids for
bonds.
    As expected, the Democrats gained control of the House of
Representatives, while Republicans increased their majority in
the Senate.
    "With gridlock, it reduces the likelihood of fiscal
stimulus. That should reduce Treasury issuance and policy
uncertainty," said Robert Tipp, chief investment strategist at
PGIM Fixed Income in Newark, New Jersey.
    That view spurred buying of longer-dated Treasuries, sending
their yields lower, while shorter-dated yields rose on
expectations of additional interest rate increases from the
Federal Reserve following last week's strong jobs data.
    Fed policymakers began a two-day meeting on Wednesday. They
are expected to leave the U.S. central bank's benchmark
overnight lending rate unchanged in a range between 2.00 and
2.25 percent.
    Meanwhile, U.S. legislators will face a growing federal
deficit funded by more borrowing.
    The Treasury Department completed this week's $83 billion
quarterly refunding with a record offering of $19 billion in
30-year bonds. This series of debt sales is expected to bring
$28.7 billion to federal coffers.
    The latest 30-year auction had the lowest demand since
February 2009; bond yields were stuck near session lows ahead of
the 1 p.m. (1800 GMT) bidding deadline.
    The poor 30-year bond sale followed a strong showing for a 
record amount of 10-year notes sold on Tuesday.
    Nevertheless, the prospects for longer-dated Treasuries
improved on the midterm elections outcome, and government data
that showed "stripping" activity reached an all-time high at
$12.2 billion in October.
    The Treasury Department allows bond dealers to separate the
interest and principal components of longer-dated government
securities and sell them to investors. Stripping activity is
seen as a gauge of investor demand for longer-dated Treasuries.
    On the open market, the benchmark 10-year Treasury note
yield was up 2.0 basis points at 3.235 percent. It
traded as high as 3.250 percent earlier on Wednesday, just a
shade below a 7-1/2-year peak of 3.261 percent reached nearly a
month ago. It had fallen to 3.176 percent earlier Wednesday.
    The two-to-10-year part of the yield curve flattened by
nearly 3 basis points to 26.70 basis points, a level not seen
since Oct. 3.
    Wall Street stock prices jumped on bets that split control
of Congress is good for equities. The S&P 500 index rose
2.1 percent on the day.
November 7 Wednesday 4:48PM New York / 2148 GMT
                               Price                  
 US T BONDS DEC8               137-3/32     -11/32    
 10YR TNotes DEC8              117-208/256  -6/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.31         2.3558    -0.010
 Six-month bills               2.45         2.5152    -0.005
 Two-year note                 99-212/256   2.9649    0.033
 Three-year note               99-136/256   3.0396    0.033
 Five-year note                99-14/256    3.0812    0.031
 Seven-year note               98-252/256   3.1633    0.026
 10-year note                  99-12/256    3.2373    0.022
 30-year bond                  91-208/256   3.4416    0.016
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       26.90        -2.70     
 30-year vs 5-year yield       36.00        -2.65     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        17.50        -1.25    
 spread                                               
 U.S. 3-year dollar swap        14.75        -1.25    
 spread                                               
 U.S. 5-year dollar swap        12.50        -0.75    
 spread                                               
 U.S. 10-year dollar swap        5.25        -0.50    
 spread                                               
 U.S. 30-year dollar swap      -10.50         0.25    
 spread                                               
 
    
 (Reporting by Richard Leong; Editing by Leslie Adler and James
Dalgleish)
  
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