August 13, 2019 / 7:04 PM / 6 days ago

TREASURIES-U.S. yield curve hits flattest in more than 12 years

    * U.S. says to delay tariffs on some Chinese U.S. goods
    * China says spoke with U.S. trade officials
    * U.S. 30-year yields rise from 3-year low
    * U.S. CPI rises in July

 (Recasts, adds new analyst comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Aug 13 (Reuters) - The U.S. Treasury yield curve
hit its flattest level in more than 12 years on Tuesday,
suggesting increased market anxiety over the state of the
economy amid trade war concerns and global political tensions.
    The spread between U.S. 2-year and 10-year note yields, a
closely watched metric for recession signals, declined to 0.6
basis point, the narrowest since June 2007, according to
Refinitiv data. The last time this yield curve inverted was also
in June 2007 in the midst of the U.S. sub-prime mortgage crisis.
    "I wouldn't say an inversion is convincing a recession
signal as we have received in previous cycles and decades
because there's so much central bank manipulation of the yield
curve," said John Hermann, rates strategist, at MUFG Securities
in New York.
    "The fact that the yield curve was so flat and could
possibly invert means that the U.S. economy is growing at or
below trend, the risks are to the downside, and that the
inflation mandate won't be achieved," he said. 
    Despite weak signals from the yield curve, U.S. yields rose
across the board on Tuesday after the Trump administration
delayed imposing a 10% import tariff on laptops, cellphones,
video game consoles and a wide range of other products made in
China. Analysts said the U.S. move served to ease trade tensions
between the two world's largest economies, at least for now. 
    U.S. two-year and 10-year note yields hit session highs
after the trade news, while those on 30-year bonds rallied from
more than three-year lows. Traders earlier were bracing for
30-year yields sinking to a record low below 2.08%.
    The U.S. tariffs had been scheduled to start next month. The
U.S. Trade Representative's Office action was published just
minutes after China's Ministry of Commerce said Vice Premier Liu
had a phone conversation with U.S. trade officials.
 
    "It's overall trade optimism for global markets," said
Justin Lederer, Treasury trader at Cantor Fitzgerald in New
York.
    That said, market sentiment remained cautious overall.
    Tuesday's data showing a pickup in U.S. inflation in July
earlier pushed yields slightly higher. Analysts said the higher
inflation was a positive sign for the U.S. economy, but was
likely not enough to deter the Federal Reserve from cutting 
interest rates at the next policy meeting in September.
    The Labor Department said the U.S. consumer price index
climbed 0.3% last month, lifted by gains in the cost of energy
products and a range of other goods. Excluding the volatile food
and energy components, the CPI gained 0.3% after rising by the
same margin in June.
    "I really think we need to see a string of stronger
inflation data before we see a mutual change in sentiment," said
Bill Merz, director of fixed income at U.S. Bank Wealth
Management in Minneapolis.
    In afternoon trading, U.S. benchmark 10-year Treasury note
yields rose to 1.681% from 1.64% late on Monday.
    Yields on 30-year bonds advanced to 2.14% from
2.13% on Monday. Thirty-year yields earlier hit 2.097%, their
lowest level since July 2016.
    At the short end of the curve, U.S. two-year yields rose to
1.666% from Monday's 1.58%.
    
      August 13 Tuesday 2:49PM New York / 1849 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.9675       2.0104    0.013
 Six-month bills               1.915        1.966     0.031
 Two-year note                 100-41/256   1.6665    0.086
 Three-year note               99-178/256   1.6044    0.096
 Five-year note                100-220/256  1.5692    0.084
 Seven-year note               101-170/256  1.6212    0.064
 10-year note                  99-128/256   1.6795    0.039
 30-year bond                  102-136/256  2.1353    0.005
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        -2.00        -0.75    
 spread                                               
 U.S. 3-year dollar swap        -4.50        -0.75    
 spread                                               
 U.S. 5-year dollar swap        -6.50         0.25    
 spread                                               
 U.S. 10-year dollar swap      -10.50         0.75    
 spread                                               
 U.S. 30-year dollar swap      -39.25         0.50    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; editing by Steve
Orlofsky and Jonathan Oatis)
  
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