December 24, 2018 / 3:08 PM / 8 months ago

TREASURIES-U.S. yields fall as nervous investors flock to bonds

    * U.S. to sell $40 bln in 2-year notes at 11:30 a.m.
    * Mnuchin call to banks raise concerns about financial
system
    * U.S. bond market to close at 2 p.m. before Christmas 

    By Richard Leong
    NEW YORK, Dec 24 (Reuters) - U.S. Treasury yields fell on
Monday with 10-year yields hovering near eight-month lows as
investors who have been unsettled by dramatic stock market
losses and further U.S. interest rate increases piled more money
into low-risk government debt.
    Trading volume was light ahead of Tuesday's Christmas
holiday. The U.S. bond market will close at 2 p.m. EST (1900
GMT) and will stay closed on Tuesday. 
    A partial U.S. government shutdown that began on Saturday
heightened anxiety among traders and fund managers and likely
will stoke demand for this week's $113 billion of coupon-bearing
Treasuries, analysts said.
    "It doesn't help things at all," Mike Lorizio, head of
Treasuries and agencies trading at Manulife Asset Management in
Boston said of the government shutdown. "We are seeing a classic
flight-to-quality move into Treasuries."
    Mick Mulvaney, the White House budget director and acting
chief of staff, said on Sunday the partial federal government
shutdown could continue to Jan. 3 as Democratic lawmakers and
President Donald Trump hit an impasse over the latter's demand
for funding for a border wall.
    Analysts see the shutdown as a temporary drag on the economy
if it were short-lived but they said other developments in
Washington have eroded investor confidence to own stocks and
other risky assets.
    News that Trump has privately discussed the possibility of
firing Federal Reserve Jerome Powell and the surprise
resignation of Defense Secretary Jim Mattis also have roiled
financial markets.
    U.S. Treasury Secretary Steven Mnuchin spoke on Sunday with
the heads of the six biggest U.S. banks to confirm they have
enough cash to lend following the biggest weekly drop of the
benchmark S&P 500 index since the Great Depression.

    Mnuchin's call raised concerns about safety of the banking
system in the wake of the stock market rout, analysts and
traders said.  
    At 10:03 a.m. ET (1503 GMT), the benchmark 10-year Treasury
yield was down 3 basis points at 2.7632 percent. It
fell to 2.7480 percent last Thursday, which was the lowest since
April 4, Refinitiv data showed.
    The two-year yield hit earlier Monday 2.6180
percent, which was the lowest since Aug. 23.
    The gap between two-year and 10-year yields
narrowed to 8.9 basis points, the tightest level in over a
decade, before bouncing back to 15.2 basis points.
    The Treasury will sell $40 billion in two-year notes at
11:30 a.m. (1630 GMT), followed by $41 billion of five-year debt
on Wednesday and $32 billion in seven-year securities on
Thursday.
    In "when-issue" activity, traders expected the upcoming
two-year Treasury supply to sell at a yield of 2.612 percent
, which would be lowest yield for this maturity at
an auction since June. 
December 24 Monday 10:04AM New York / 1504 GMT
                               Price                  
 US T BONDS MAR9               145-8/32     14/32     
 10YR TNotes MAR9              121-76/256   9/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.3525       2.3985    0.013
 Six-month bills               2.465        2.5297    -0.005
 Two-year note                 100-67/256   2.6094    -0.034
 Three-year note               100-30/256   2.5836    -0.044
 Five-year note                101-70/256   2.5978    -0.044
 Seven-year note               101-48/256   2.6858    -0.032
 10-year note                  103-28/256   2.7632    -0.029
 30-year bond                  107-40/256   3.0101    -0.017
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       15.10        0.15      
 30-year vs 5-year yield       41.30        2.30      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        13.00        -0.50    
 spread                                               
 U.S. 3-year dollar swap        10.00        -0.50    
 spread                                               
 U.S. 5-year dollar swap         8.00        -0.75    
 spread                                               
 U.S. 10-year dollar swap        2.00        -1.50    
 spread                                               
 U.S. 30-year dollar swap      -14.50        -1.50    
 spread                                               
 
    

 (Reporting by Richard Leong
Editing by Bill Trott and Jonathan Oatis)
  
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