June 18, 2019 / 7:14 PM / a month ago

TREASURIES-U.S. yields plummet after Draghi comments; Fed decision ahead

    * Draghi says ECB to launch more stimulus if inflation stays
low
    * European bond yields fall after Draghi's comments
    * Fed decision looms on Wednesday; no move expected

 (Adds comments, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 18 (Reuters) - U.S. Treasury yields plunged
on Tuesday, in line with the European market, after European
Central Bank President Mario Draghi hinted at more stimulus if
regional inflation fails to pick up toward its target.
    U.S. benchmark 10-year yields fell to their lowest since
early September 2017, while 30-year yields hit their weakest
since late October 2016.
    "(We) will use all the flexibility within our mandate to
fulfill our mandate - and we will do so again to answer any
challenges to price stability in the future," Draghi said on
Tuesday.
    German bond yields hit record lows deep in
negative territory, and French 10-year yields turned
negative for the first time since at least 1985 after Draghi's
comments.
    "Draghi was extremely dovish and this had a big impact on
Treasuries as we anticipate the Federal Reserve," said Ellis
Phifer, market strategist at Raymond James in Memphis,
Tennessee. 
    The Fed will not cut rates this month, or be as dovish as
Draghi, he added. "I think there are still signs that the United
States is stronger than Europe, but obviously Europe becomes an
issue for global growth if it continues to decline."
    The Fed starts its two-day meeting on Tuesday. Analysts
expect the Fed to hold interest rates steady at the meeting, but
think it could alter its rate forecasts and change its language
to set the stage for possible easing this year.
    In afternoon trading, U.S. 10-year note yields fell to
2.056% from 2.086% late on Monday, after reaching
2.016%, the lowest since September 2017.
    Yields on U.S. 30-year bonds dropped to 2.556%,
from 2.547% on Monday. Earlier, 30-year yields dropped to a
nearly 2-1/2-year trough of 2.513%.
    At the short end of the curve, U.S. 2-year yields were down
slightly at 1.862% from Monday's 1.865%.
    Since the year began, both 10-year and 2-year yields have
fallen around 63 basis points, on track for their steepest
decline since 2014 and 2008, respectively. 
    John Bellows, portfolio manager at Western Asset, said the
Fed's low-inflation focus creates an "unmistakably dovish
backdrop" for monetary policy and has contributed to lower bond
yields this year.
    "The current market pricing of Fed hikes is consistent with
a worse outcome for growth and inflation than we expect," he
said. "The low inflation backdrop will limit any upward movement
of yields."
    U.S. Treasury prices earlier rallied in response to a U.S.
announcement on Monday that Washington would deploy 1,000 more
troops in the Middle East, citing concerns about a threat from
Iran. On Tuesday, Iran said it would not wage war against any
nation.
    
    Tuesday, June 18, at 1450 EDT (1850 GMT):
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.1775       2.2262    0.028
 Six-month bills               2.1375       2.1969    -0.002
 Two-year note                 100-127/256  1.8643    -0.001
 Three-year note               99-218/256   1.8012    -0.003
 Five-year note                100-202/256  1.8324    -0.015
 Seven-year note               101-60/256   1.9342    -0.024
 10-year note                  102-212/256  2.0578    -0.028
 30-year bond                  106-200/256  2.5495    -0.027
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.50        -0.75    
 spread                                               
 U.S. 3-year dollar swap         1.75        -0.50    
 spread                                               
 U.S. 5-year dollar swap        -1.50        -0.25    
 spread                                               
 U.S. 10-year dollar swap       -6.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -32.00         0.00    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci
and Richard Chang)
  
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