September 20, 2019 / 6:15 PM / 24 days ago

TREASURIES-Yields fall as China cancels US farm visits

 (Recasts with China canceling farm visits, updates prices)
    * Chinese delegation cancels U.S. farm visits
    * Fed to support repo market through October
    * Fed interest rate policy in focus

    By Karen Brettell
    NEW YORK, Sept 20 (Reuters) - U.S. Treasury yields fell on
Friday after a Chinese delegation canceled planned visits to
U.S. farms, raising concerns that the United States and China
are unlikely to forge a trade deal in the near term.
    The Montana Farm Bureau said that the delegation canceled
their trip to Montana and will instead return to China sooner
than originally scheduled.             
    U.S. President Donald Trump said earlier on Friday that his
administration was "making a lot of progress" with China, as
deputy-level trade talks continued for a second day and
Washington lifted tariffs on more than 400 Chinese products.
            
    Benchmark 10-year notes             gained 6/32 in price to
yield 1.755%, down from 1.774% on Thursday.
    Bonds were also supported after the New York Federal Reserve
said it plans to pour cash into the U.S. banking system through
early October to avert another market disruption, after the cost
of loans in the overnight repurchase agreement (repo) market
soared to 10% on Tuesday.             
    “The repo focus has completely overwhelmed the focus on the
Fed,” said Brian Daingerfield, head of G10 FX Strategy, Americas
at NatWest Markets. “I think the market is quite focused on what
that means for longer-term funding costs.”
    High short-term funding costs can reduce demand for fixed
income including Treasuries as it makes it more expensive to
fund the positions.
    The U.S. central bank is expected to introduce a longer-term
solution to ease conditions as funding stresses are seen as
likely to pick up again into year-end.
    Investors are also focused on whether further interest rate
cuts are likely this year, after the Fed cut benchmark rates for
the second time this year on Wednesday.
    New projections showed policymakers at the median expected
rates to stay within the new range through 2020. However, in a
sign of ongoing divisions within the Fed, seven of 17
policymakers projected one more quarter-point rate cut in 2019.
            
    “This has been a month where central banks have really
reserved fire,” Daingerfield said. “You have seen some
flattening of the curve, that reflects dovish disappointment not
just from the Fed but from central banks across the G10 this
month.”
    The yield curve between two-year and 10-year notes
               has flattened to 3 basis points, from 7 basis
points before the Fed statement on Wednesday.
    Fed officials put their divisions on full display on Friday
with warnings of a slowdown and financial risks bookending talk
of how well things are going.             
    

 (Editing by Nick Zieminski and Steve Orlofsky)
  
 
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