October 25, 2019 / 8:07 PM / 21 days ago

TREASURIES-U.S. yields rise on China trade deal progress; Fed looms

    * U.S., China 'close to finalizing' parts of Phase 1 trade
pact
    * U.S. 5-year, 7-year, 10-year yields hit five-week high
    * U.S. two-year yields touch three-week peak
    * Fed widely seen cutting rates by 25 basis points next week

 (Recasts, updates prices, adds comment)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Oct 25 (Reuters) - U.S. Treasury yields rose on
Friday after the United States said it was close to finalizing
parts of a trade deal with China, suggesting that with global
risks easing the Federal Reserve may not have to be aggressive
in cutting interest rates this year and next.
    Yields on U.S. five-year, seven-year, and benchmark 10-year
notes climbed to a five-week peaks, while those on two-year
notes hit a three-week high.
    On Friday, the U.S. Trade Representative's office said U.S.
and Chinese trade officials were "close to finalizing" some
parts of an agreement after high-level telephone discussions.
The USTR provided no details though.
    "The sell-off got more intense on the front-end today and I
think this speaks to the fact that the Fed has remained
accommodative more than they needed to because of Brexit and the
trade war tail risks," said Michael Chang, U.S. rates strategist
at Societe Generale in New York.
    "But now with both risks reducing by a good amount the last
few weeks, the general view is that the Fed is still going to
cut, but beyond that, they can afford to take a pause. So more
follow-up cuts is not a sure thing anymore," he said.
    In afternoon trading, U.S. 10-year note yields
edged up to 1.796% from 1.766% late on Thursday.
    Yields on 30-year bonds advanced to 2.288%, from
2.259% on Thursday.
    On the short-end of the curve, U.S. two-year yields rose to
1.623%, from Thursday's 1.582%.
    Prior to the China trade news, U.S. yields were little
changed, trading without direction for the most part over the
last two to three days. 
    "Realized volatility in the last two weeks has been very
compressed and seems to have bled out all the bearish momentum
leading into the month of October," said Guy LeBas, chief fixed
income strategist, at Janney Montgomery Scott in Philadelphia.
    Next week's Federal Open Market Committee policy meeting is
widely expected to result in a cut in interest rates of 25 basis
points, and that has been priced in.
    But some analysts expect a "hawkish" or more aggressive 
cut,  which would mainly be for insurance purposes and not
because the U.S. economy desperately needs it.
    Analysts at NatWest Markets said the Fed is near the tipping
point between "insurance" cuts and a more prolonged cutting
cycle.
    "But we suspect Fed signaling, both in its statement and
press conference, will suggest that the Fed still sees itself in
a meeting-to-meeting, insurance cutting mode," Natwest said in a
note.
    The bank believes that for now, the FOMC is divided about
making a dovish shift especially amid shifting expectations
around Brexit and U.S.-China trade negotiations.
    
      October 25 Friday 3:27 PM New York / 1927 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.6375       1.6714    -0.003
 Six-month bills               1.6225       1.6629    0.005
 Two-year note                 99-193/256   1.6256    0.044
 Three-year note               99-74/256    1.6215    0.039
 Five-year note                99-104/256   1.6241    0.039
 Seven-year note               99-112/256   1.7106    0.035
 10-year note                  98-116/256   1.7978    0.032
 30-year bond                  99-40/256    2.2891    0.030
                                                      
   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        -1.50        -0.50    
 spread                                               
 U.S. 5-year dollar swap        -3.00        -1.00    
 spread                                               
 U.S. 10-year dollar swap       -8.50        -0.50    
 spread                                               
 U.S. 30-year dollar swap      -38.50        -0.50    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss 
Editing by Alistair Bell and Tom Brown)
  
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