March 6, 2019 / 8:33 PM / 7 months ago

TREASURIES-Wall Street weakness, dovish Fed weigh on yields

(Recasts, updates yields, adds analyst quote)

By Kate Duguid and Gertrude Chavez-Dreyfuss

NEW YORK, March 6 (Reuters) - U.S. Treasury yields retreated on Wednesday as stocks weakened and remarks from New York Federal Reserve President John Williams about the persistence of low inflation further curtailed expectations of interest rate hikes in the near future.

Wall Street shares traded lower on the day, falling for a third consecutive session after a strong start this year, contributing to higher Treasury prices.

“The volume is slow, and I think that the weakness in stocks is part of the reason for the bid in the Treasuries,” said Lou Brien, market strategist at DRW Trading.

Global growth concerns helped weigh on stocks. The Organization for Economic Co-Operation and Development on Wednesday cut forecasts again for the global economy in 2019 and 2020, following previous downgrades in November, as it warned trade disputes and uncertainty over Brexit would hit world commerce and businesses.

“It seems like the rally in risky assets seems to be running out of steam,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “Overall though, the market is trading sideways ahead of the ECB meeting and the U.S. payrolls report,” she added.

Dovish comments from New York Fed’s Williams also contributed to lower Treasury yields. “With a strong labor market, moderate growth, and no sign of any significant inflationary pressures, the baseline outlook is quite favorable,” Williams said in prepared remarks at the Economic Club of New York. “What will the response of the Fed be? My short answer: It depends!”

“The continued comments from Fed people - like Williams - that they don’t see any inflation and don’t anticipate having to make any kind of move based on inflation for a while is also supportive (of yields),” said Brien.

Weak euro zone data in the past few weeks has fueled expectations that the European Central Bank at Thursday’s meeting could downgrade its growth and inflation forecasts for 2019 and hold off raising interest rates, analysts said. U.S. rates typically track German bond yields on the day of an ECB policy meeting.

“A downgrade of the 2019, and maybe 2020, GDP projection won’t come as a surprise,” Macquarie said in a research note.

In afternoon trade, U.S. 10-year note yields slipped 3.2 basis points to 2.690 percent. U.S. 30-year bond yields also fell, to 3.066 percent, 2.1 basis points lower. At the short end of the curve, two-year yields were down 3.3 basis points to 2.518 percent. (Reporting by Gertrude Chavez-Dreyfuss and Kate Duguid; Editing by Jonathan Oatis and Diane Craft)

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