July 8, 2019 / 7:28 PM / 2 months ago

TREASURIES-Yield curve flattest since May as market awaits Fed guidance

 (Recasts, updates yields, adds analyst quotes)
    By Kate Duguid
    NEW YORK, July 8 (Reuters) - The U.S. Treasury yield curve
hit its flattest level in more than a month on Monday as
investors tempered Friday's reaction to the strong June
employment data, with yields on long-duration bonds falling even
as traders significantly reduced bets for an aggressive rate cut
by the Federal Reserve later this month.
    Investors are now focused on Fed Chairman Jerome Powell's
testimony before Congress later in the week for clues on
monetary policy.
    A sharp rebound in U.S. job growth in June cut expectations
that the Fed will cut interest rates by 50 basis points when it
meets at the end of July.
    A week ago, the market forecast an 80.1% chance of a
25-basis-point cut, and a 19.9% chance of a 50-basis-point cut,
according to CME Group's FedWatch tool. In afternoon trade, the
chances were 92% and 8%, respectively. 
    "To suggest the market is in a holding pattern ahead of
Powell’s appearance on Wednesday would be an understatement.
This week’s events are clearly weighted toward the latter half
and it would appear so is the potential for any meaningful price
action," said Ian Lyngen, head of U.S. rates strategy at BMO
Capital Markets. 
    Powell will deliver the Fed's semiannual monetary policy
report to the House of Representatives Financial Services
Committee on Wednesday, followed by testimony before the Senate
Banking Committee on Thursday.
    The long end of the Treasury yield curve on Monday was
lower, with the short end up modestly. The spread between two-
and 10-year yields, the most widely used measure
of the yield curve, fell to a low of 14.9 basis points from its
close Friday at 16.9. 
    The yield on the benchmark 10-year note was last
down half a basis point at 2.039%, with the 30-year yield
 2.4 basis points lower at 2.524%. The moves tempered
the dramatic rise in yields on Friday following the jobs report,
a reaction which may have been exaggerated by low-volume trading
following the Fourth of July holiday. 
    Later in the week, the United States will report consumer
price inflation numbers, which are expected to be weak as a
result of lower gasoline prices. "It may provide the final piece
of confirmation for a 25-basis-point rate cut in July," wrote
Thomas Simons, senior money market economist at Jefferies.

    July 8 Monday 3:06PM New York / 1906 GMT
                               Price                  
 US T BONDS SEP/d              155-15/32    16/32     
 10YR TNotes SE/d              127-140/256  3/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.1925       2.2408    0.023
 Six-month bills               2.07         2.1203    -0.009
 Two-year note                 99-127/256   1.886     0.013
 Three-year note               99-196/256   1.8323    0.005
 Five-year note                99-134/256   1.8507    0.009
 Seven-year note               99-156/256   1.9351    0.006
 10-year note                  102-252/256  2.0389    -0.005
 30-year bond                  107-84/256   2.524     -0.024
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       15.10        -1.80     
 30-year vs 5-year yield       67.20        -3.65     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.75        -0.75    
 spread                                               
 U.S. 3-year dollar swap         0.75        -0.50    
 spread                                               
 U.S. 5-year dollar swap        -2.75        -0.75    
 spread                                               
 U.S. 10-year dollar swap       -6.00        -0.75    
 spread                                               
 U.S. 30-year dollar swap      -32.00         0.00    
 spread                                               
 
 (Reporting by Kate Duguid; Editing by Leslie Adler)
  
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