August 5, 2019 / 6:02 PM / 3 months ago

TREASURIES-U.S. yields drop as U.S.-China trade row feeds bond rally

    * Treasuries record best week since November 2011
    * U.S. services sector growth slowest in three years -ISM
    * Futures imply traders fully expect Fed rate cut in
    * U.S. to sell $84 bln in coupon-bearing debt this week

 (Updates market action)
    By Richard Leong
    NEW YORK, Aug 5 (Reuters) - U.S. Treasury yields tumbled on
Monday, with 10-year yields hitting their lowest level since
November 2016, as fears over escalation of U.S.-China trade
tensions renewed concerns about an economic downturn, spurring
another dramatic rally for bonds.
    China allowed the yuan to breach the key seven-per-dollar
level for the first time in more than a decade, in a sign
Beijing might be willing to tolerate more currency weakness that
could further inflame the trade conflict with the United States.
    Chinese state media said local firms have halted their
purchases of agricultural products, elevating nervousness the
world's two biggest economies are going toe-to-toe in their
trade dispute.
    These measures followed U.S. President Donald Trump's threat
last week to impose 10% tariffs on $300 billion of Chinese
imports starting Sept. 1.
    "There's a lot of fears out there," said Larry Milstein,
head of government and agency trading at R.W. Pressprich & Co.
in New York. "What is the path that could end this? It doesn't
seem we are going to get there anytime soon."
    The growing trade friction between the world's two biggest
economies appeared to begin hurting the U.S. services sector on
top of the squeeze on domestic manufacturers. 
    The Institute for Supply Management's index on U.S. services
activity showed the vast economic sector's growth slowed to its
weakest level in three years in July.
    Anxious investors have been bailing from stocks and other
risky assets with Wall Street's main stock indexes falling 2%.

    They have favored U.S. government debt, the yen, gold and
other perceived low-risk assets to park their money.
    The Treasuries market recorded a total return of 1.31% last
week, which was its biggest weekly gain since November 2011,
according to an index compiled by Bloomberg and Barclays.
    At 1:47 p.m. (1747 GMT), the yields on benchmark 10-year
Treasury notes were down 12.4 basis points at
1.7311%. They hit 1.729% earlier on Monday, which was their
lowest since Nov. 9 2016, the day after Trump was elected
    The two-year yield, which is sensitive to
traders' view on Fed policy, touched 1.577%, its lowest since
November 2017. It was last 14.3 basis points lower at 1.5793%.
    Interest rates futures implied traders fully expect the U.S.
central bank will lower rates again at its Sept. 17-18 policy
meeting after it cut them for the first time since 2008 last
week, CME Group's FedWatch program showed.
    The difference between the three-month Treasury bill rate
 and 10-year yields grew to nearly 27
basis points, the widest since April 2007. 
    This curve "inversion" between the two maturities has
preceded every U.S. recession in the past 50 years.
    Meanwhile, the blistering demand for Treasuries is expected
to stoke bids for this week's quarterly refunding where the
government will sell $38 billion in three-year debt, $27 billion
in 10-year notes and $19 billion in 30-year bonds.
   Monday, Aug. 5, at 1348 EDT (1748 GMT):
 US T BONDS SEP9               160-25/32    70/32     
 10YR TNotes SEP9              129-224/256  33/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.97         2.0123    -0.052
 Six-month bills               1.9425       1.9885    -0.027
 Two-year note                 100-85/256   1.5793    -0.143
 Three-year note               100-154/256  1.5398    -0.139
 Five-year note                101-12/256   1.531     -0.139
 Seven-year note               101-174/256  1.6196    -0.131
 10-year note                  105-196/256  1.7311    -0.124
 30-year bond                  112-144/256  2.2906    -0.101
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       15.00        1.90      
 30-year vs 5-year yield       76.00        3.80      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        -0.25        -2.75    
 U.S. 3-year dollar swap        -4.50        -3.25    
 U.S. 5-year dollar swap        -6.00        -2.25    
 U.S. 10-year dollar swap      -10.75        -2.25    
 U.S. 30-year dollar swap      -42.00        -3.50    

 (Reporting by Richard Leong
Editing by Steve Orlofsky, Paul Simao and Susan Thomas)
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