February 6, 2019 / 3:55 PM / 5 months ago

TREASURIES-U.S. yields slide in line with Fed rate outlook; German data weighs

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 6 (Reuters) - U.S. Treasury yields fell for a
second straight session on Wednesday, as investors continued to
factor in the Federal Reserve's dovish shift on interest rates,
with concerns about slowing growth in Germany adding to the
     The Fed last week shifted its stance on monetary policy as
it acknowledged the challenges facing the U.S. economy. Its
remarks suggested that it may pause its rate-hike cycle, or even
ease policy if the economy requires it.
    "Hedge funds and the asset managers of the world are betting
that the Fed has indeed hinted at a pause," said Wen Lu, rates
strategist at TD Securities in New York.
    "We are currently pricing in about 2.5 basis points of
easing and so no hike this year has been priced at all," he
    U.S. yields also moved in tandem with 10-year German bund
yields, which fell after German industrial orders in December
fell 1.6 percent, with analysts anticipating a possible
recession in the euro zone's largest economy.
    German 10-year yields fell to a low of 0.15
    "Further disappointment from the German manufacturing sector
received the lion's share of the credit for the drop in 10-year
yields below 2.70 percent," BMO Capital Markets said in a
research note.
    "The implicit question for the engine of European growth has
shifted from if there will be a slowdown to how severe of a
recession to anticipate."
    In mid-morning trading, U.S. 10-year note yields fell to
2.682 percent, from 2.704 percent late on Tuesday.
    BMO said with 10-year yields effectively in the middle of
the 2019 trading range and the more time spent between 2.54
percent and 2.80 percent, the more difficult it is to play for a
re-test of 3.00 percent.
    U.S. 30-year bond yields, were also down at 3.016 percent
, from 3.036 percent on Tuesday.
    On the short end of the curve, U.S. 2-year yields slipped as
well to 2.51 percent, compared with Tuesday's 2.52 percent
    Investors are now looking to the sale of $27 billion in U.S.
10-year notes later on Wednesday.
    Subadra Rajappa, head of U.S. rates strategy at Societe
Generale, said the 10-year price needs to fall a little bit more
going into auction as it has been "rich on an outright basis."
    The last 10-year note auction showed solid demand, with a
lower yield than market forecasts and an increase in the
bid-to-cover ratio, which Rajappa said is a positive for the
upcoming auction.
      February 6 Wednesday 10:41AM New York / 1541 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.365        2.4123    -0.005
 Six-month bills               2.4325       2.497     -0.005
 Two-year note                 99-251/256   2.51      -0.012
 Three-year note               100-12/256   2.4837    -0.016
 Five-year note                100-8/256    2.4932    -0.020
 Seven-year note               100-80/256   2.5758    -0.024
 10-year note                  103-200/256  2.6821    -0.022
 30-year bond                  107-4/256    3.0161    -0.020
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        15.00         0.50    
 U.S. 3-year dollar swap        12.00         1.00    
 U.S. 5-year dollar swap         9.00         0.50    
 U.S. 10-year dollar swap        2.50         0.25    
 U.S. 30-year dollar swap      -18.75         0.00    
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Susan Thomas)
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