November 30, 2018 / 3:44 PM / 11 days ago

TREASURIES-Yields curve flattens, volume low ahead of U.S.-China trade talks

NEW YORK, Nov 30 (Reuters) - The spread between short- and long-dated yields narrowed and Treasury trading volume was at a three-month low on Friday morning as investors held off on making big bets ahead of trade talks between the United States and China during the Group of 20 meeting that began today.

The leaders of the world’s top economies gathered in Argentina on Friday for talks overshadowed by a U.S.-China trade war that has roiled global markets. All eyes will be on a planned dinner between Presidents Donald Trump and Xi Jinping on Saturday to see whether they can make progress toward resolving a trade dispute which has seen them exchange tariffs on hundreds of billions of dollars of imports.

A report from the Wall Street Journal on Thursday said the two countries were exploring a deal in which Washington would suspend further tariffs through the spring of 2019 in exchange for new talks “looking at big changes in Chinese economic policy.”

“It’s a low-volume day. People are going to be positioning themselves light on risk ahead of the G20 meeting. Everyone’s attention is on that at this point,” said Lisa Hornby, fixed income portfolio manager at Schroders.

Trade volume of Chicago Board of Trade 10-year Treasury futures were at their lowest since Sept. 4. Yields followed the same patterns they were in on Thursday, with a rise in two-year yields, and a fall in all others, with the biggest moves happening at the long end of the curve. That flattened the yield curve further, with the spread between two- and 10-year yields hitting 18.9 basis points, the lowest since Aug. 28.

The spread between two- and five-year Treasury yields was approaching inversion, narrowing to as low as 2.2 basis points. Two-year yields are indicative of traders’ expectations of interest rate hikes. A speech this week from Federal Reserve Chair Jerome Powell and minutes from the last Fed policy-making meeting showed October’s market volatility would not deter the U.S. central bank from raising interest rates in December and beyond, bolstering the two-year yield.

But the FOMC meeting minutes also opened debate on when to pause further hikes and Powell said that rates were close to neutral. This indicates the Fed may consider pausing the rate-hiking cycle at some point in 2019.

“The Fed is going to get a few more rate hikes in before it has to pause, and that benefits the belly of the curve, that benefits the five-year note. By the time you get out five years, you might even have a rate-cutting cycle,” said Hornby. (Reporting by Kate Duguid; editing by Jonathan Oatis)

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