September 17, 2019 / 6:14 PM / a month ago

TREASURIES-Yields edge lower before Fed meeting

 (Updates prices)
    * Fed expected to cut rates on Wednesday
    * Soaring repo costs show stress in funding markets
    * Higher oil prices, Iran tension boosts safety buying

    By Karen Brettell
    NEW YORK, Sept 17 (Reuters) - U.S. Treasury yields fell on
Tuesday, ahead of an expected interest rate cut by the Federal
Reserve at the conclusion of its two-day policy meeting on
Wednesday.
    While a rate cut is seen as near-certain this month, there
are deep disagreements among Fed policymakers.             
    Investors will focus on the so-called “dot plot,” which
shows where policymakers expect rates to be in the future.
    “I would expect to see a lot more dispersion between all the
dots going forward especially as we know there are a lot of
contrasting views at the Fed right now,” said Justin Lederer, an
interest rate strategist at Cantor Fitzgerald in New York.
    The U.S. central bank will also be expected to address
stress in the U.S. funding markets.
    The cost for banks and Wall Street dealers to borrow dollars
in the overnight repurchase agreement market           rose as
high as 10% on Tuesday, well above the Fed’s target range of
2.00%-2.25%.
    It then fell to zero after the New York Federal Reserve said
it would conduct a repurchase operation in a bid to lower the
funding costs.                          
    “The Fed’s going to have to in some way address what’s going
on in the funding markets,” Lederer said.
    Safe-haven U.S. debt was also bid on concern that an attack
on Saudi Arabian crude oil facilities could lead to further
spikes in oil costs, weighing on the economy, and potentially
spur a war between the United States and Iran.
    U.S. President Donald Trump said on Monday that it looked
like Iran was behind the weekend strike on the Saudi facilities,
which cut 5% of global production but stressed he did not want
to go to war. Iran denied it was to blame.             
    Benchmark 10-year notes             gained 14/32 in price to
yield 1.794%, down from 1.843% on Monday. 
    The notes briefly gave up price gains after Reuters reported
that Saudi Arabia's oil output will be fully restored quicker
than thought, taking two or three weeks not months as initial
indications suggested.
    Data on Tuesday showed that U.S. manufacturing output
increased more than expected in August, boosted by a surge in
machinery and primary metals production.             

 (Editing by Bernadette Baum and Lisa Shumaker)
  
 
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