November 7, 2018 / 8:01 PM / 8 days ago

TREASURIES-U.S. yields fall as elections split control of U.S. Congress

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

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Nov 7 (Reuters) - U.S. Treasury yields fell on
Wednesday as midterm elections for federal lawmakers divided
control of the U.S. Congress between the two major political
parties, leaving investors to assess its impact on government
spending and borrowing in the coming year.
    As expected, the Democrats gained control of the House of
Representatives, while Republicans increased their majority in
the Senate. Analysts expect political gridlock that would hamper
passage of major fiscal measures.
    "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.
    Still, 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 an additional
$28.7 billion to federal coffers.
    The latest 30-year auction suffered its lowest demand since
February 2009, as 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.
    Still, the prospects for longer-dated Treasuries improved on
the midterm election 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 to sell them to investors.
    Stripping activity is seen as a gauge on investor demand for
longer-dated Treasuries.
    "The talk has been larger supply means higher yields, but we
haven’t seen that," said Gene Tannuzzo, deputy global head of
fixed income at Columbia Threadneedle in Minneapolis. "The
long-end has held up quite well.” 
    On the open market, the benchmark 10-year Treasury yield
 was down over 1 basis point at 3.204 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. 
    Borrowing costs for the government and private sector will
likely head higher as the Federal Reserve is expected to raise
short-term interest rates and shrink its balance sheet more. 
    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 percent
and 2.25 percent.
    The futures market implied they will raise rates for a
fourth time in 2018 at their Dec. 18-19 policy meeting.
 
November 7 Wednesday 2:50PM New York / 1950 GMT
                               Price                  
 US T BONDS DEC8               137-14/32    0/32      
 10YR TNotes DEC8              118          0/32      
                               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                 99-220/256   2.9485    0.016
 Three-year note               99-152/256   3.0176    0.011
 Five-year note                99-40/256    3.0589    0.009
 Seven-year note               99-36/256    3.138     0.001
 10-year note                  99-72/256    3.2096    -0.005
 30-year bond                  92-56/256    3.4184    -0.008
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       26.00        -3.55     
 30-year vs 5-year yield       35.90        -2.80     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.00        -0.75    
 spread                                               
 U.S. 3-year dollar swap        15.25        -0.75    
 spread                                               
 U.S. 5-year dollar swap        12.50        -0.75    
 spread                                               
 U.S. 10-year dollar swap        5.50        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -10.25         0.50    
 spread                                               
 
    

    
 (Reporting by Richard Leong; Editing by David Gregorio and Dan
Grebler)
  
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