October 28, 2019 / 7:48 PM / 24 days ago

TREASURIES-Yields higher on expected Fed cut, Brexit developments

 (New throughout, adds analyst quotes)
    By Kate Duguid
    NEW YORK, Oct 28 (Reuters) - U.S. Treasury yields were
higher on Monday ahead of an expected interest rate cut at this
week's Federal Reserve policy meeting and as the latest Brexit
developments boosted the British pound and market appetite for
risk. 
    The European Union agreed to a three-month flexible Brexit
delay on Monday but the British parliament rejected Prime
Minister Boris Johnson's bid to end the political paralysis with
a Dec. 12 election. Allowing Britain more time to come to a
consensus lowers chances of a no-deal exit, reducing uncertainty
and with it, investor demand for safe-haven investments like
U.S. government bonds.
    That outweighed the potential uncertainty brought about by
Johnson's third failure to call a snap election. Though yields
ticked down following the election news, they remained higher on
the day. The benchmark 10-year yield was last up 4.4
basis points at 1.846%, with the 30-year yield up
4.5 basis points at 2.338%. 
    With "the risk-positive impulse from the Brexit extension,
(it) makes sense that rates are coming back higher. From a
technical lens, we broke a couple pretty significant support
points, which suggests that 10s could sell off further from
here. In particular, we're watching that 1.90% level," said Jon
Hill, U.S. rate strategist at BMO Capital Markets.
    At the conclusion of its two-day policy meeting on
Wednesday, the Federal Open Market Committee is widely expected
to cut interest rates by 25 basis points for the third time this
year.
    Traders' expectations of an October cut were 95.1% on
Monday, compared with 89.8% a week prior, according to CME
Group's FedWatch tool. The two-year Treasury yield,
which reflects investor expectations of changes in interest-rate
policy, was up 1.9 basis points to 1.646%.
    But some analysts are expecting a hawkish statement to
accompany the cut, which would suggest a pause in Fed rate cuts
after October.
    "The base case is something like a hawkish cut, by which
they cut one more time, that sets a 75-basis-point parallel to
the late 90s. And then they try to set up being on pause from
here," said Hill.
    "I don't expect them to seriously commit to not cutting
again. Instead they'll try to keep flexibility. But at least
moderate expectations for a fourth cut in December."
    
    October 28 Monday 3:33PM New York / 1933 GMT
                               Price                  
 US T BONDS DEC/d              158-13/32    -31/32    
 10YR TNotes DE/d              129-48/256   -11/32    
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.6175       1.6508    -0.023
 Six-month bills               1.6125       1.6525    -0.010
 Two-year note                 99-183/256   1.6455    0.019
 Three-year note               99-52/256    1.6517    0.028
 Five-year note                99-54/256    1.6651    0.038
 Seven-year note               99-42/256    1.7524    0.038
 10-year note                  98-8/256     1.8455    0.044
 30-year bond                  98-28/256    2.3384    0.045
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       19.80        2.35      
 30-year vs 5-year yield       67.30        0.65      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.75         0.00    
 spread                                               
 U.S. 3-year dollar swap        -1.25         0.00    
 spread                                               
 U.S. 5-year dollar swap        -3.25        -0.25    
 spread                                               
 U.S. 10-year dollar swap       -8.50         0.00    
 spread                                               
 U.S. 30-year dollar swap      -38.50         0.00    
 spread                                               
 
 (Reporting by Kate Duguid; editing by Jonathan Oatis and
Richard Chang)
  
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