October 1, 2018 / 7:29 PM / in 20 days

TREASURIES-Yields tick up as risk assets gain on U.S.-Canada pact

 (Recasts; adds Italy, ISM news, analyst quotes)
    By Kate Duguid
    NEW YORK, Oct 1 (Reuters) - Yields on U.S. government bonds
rose modestly on Monday, as risk assets rallied off the weekend
announcement that the United States and Canada had reached a
deal to save NAFTA as a trilateral pact with Mexico. 
    Yields at the long end of the curve benefited most, with the
30-year bond yield last up 3.7 basis points from
Friday's close to 3.234 percent and the 10-year yield
 up 2.6 basis points to 3.082 percent. The short end
of the curve was little affected, with the two-year yield
 up less than half a basis point in afternoon trade. 
    Sunday's agreement will preserve the three-country pact,
rescuing a deal that underpins a $1.2 trillion open trade zone
that had been about to collapse after nearly a quarter century.
The North American Free Trade Agreement (NAFTA) will become the
United States-Mexico-Canada Agreement (USMCA).
    The government debt market moves were muted compared with
gains in the equities market, however. The S&P 500 index
up 14.04 points from Friday's close and the Dow Jones Industrial
Average was up 214.45 points. 
    "We've come out of the weekend in a positive risk
environment. Treasuries, however, have been relatively
unchanged," said Brian Daingerfield, macro strategist at NatWest
Markets in Stamford, Connecticut.
    Analysts suggested several reasons for the muted reaction of
 Treasuries. First, the Treasury market is primarily taking its
cues from U.S. economic data, which remains strong enough that
traders may have concluded that trade tensions would not have
had a significant impact on the American economy. 
    "(The trade agreement) is a positive, and you've seen risk
assets respond, and you've seen Treasuries respond a bit, but
U.S. fundamentals are so strong right now that the effects of
these negotiations had already been priced in," said Mike
Lorizio, senior fixed income trader at Manulife Asset Management
in New York.
    That theory was supported this morning with the release of
solid ISM manufacturing data. The measure of U.S. factory
activity retreated from a more than 14-year high in September as
growth in new orders slowed, but supply bottlenecks appeared to
be easing, suggesting a steady pace of expansion in
manufacturing. The data bumped yields up modestly in mid-morning
trade.
    Also restraining yields were euro zone worries about Italy's
2019 budget, which could significantly increase the country's
debt. As Italian government bonds sold off, prices
on safe-haven U.S. bonds rose. 
    The move in longer-dated yields steepened the curve, with
the spread between two- and 10-year yields up
nearly 2 basis points to 25.5. The spread between the five- and
30-year yields was also up 2 basis points, to
27.2. 
    
      Monday, Oct. 1 at 1456 EDT (1856 GMT):
                               Price                  
 US T BONDS DEC8               139-31/32    -0-17/32  
 10YR TNotes DEC8              118-172/256  -0-28/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.165        2.2065    0.008
 Six-month bills               2.3225       2.382     0.010
 Two-year note                 99-220/256   2.8229    0.004
 Three-year note               99-158/256   2.8859    0.003
 Five-year note                99-158/256   2.958     0.010
 Seven-year note               99-204/256   3.0324    0.015
 10-year note                  98-72/256    3.078     0.022
 30-year bond                  95-152/256   3.231     0.035
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        16.50        -0.25    
 spread                                               
 U.S. 3-year dollar swap        16.50         0.25    
 spread                                               
 U.S. 5-year dollar swap        11.50         0.00    
 spread                                               
 U.S. 10-year dollar swap        5.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap       -8.25        -0.75    
 spread                                               
 

    
    

 (Reporting by Kate Duguid
Editing by Susan Thomas)
  
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