* Benchmark 10-year note yields lowest since late July
* Relief felt after debt ceiling pact, at least for now
* Focus on upcoming data, September payrolls due Tuesday
By Ellen Freilich
NEW YORK, Oct 18 U.S. Treasury yields fell to
their lowest in nearly three months on Friday as a deal to avert
a U.S. debt default and reopen the government encouraged
investors to put money to work amid some expectations the
Federal Reserve would not trim its stimulus until next year.
A last-minute agreement to restore government funding until
mid-January and extend the borrowing limit to Feb. 7 soothed
fears the United States would not meet benefit payments and debt
obligations in coming days.
Traders cited "real money" buying through long-dated
maturities. The buying narrowed the difference between short-
and long-term yields, "flattening" the yield curve.
Two-year notes were unchanged, yielding 0.327
percent, while 30-year bonds were up 16/32, their
yields falling to 3.64 percent from 3.66 percent on Thursday.
Benchmark 10-year notes, which rose on Wednesday
in anticipation of a deal and climbed again on Thursday when a
pact was concluded, were up 4/32 on Friday, their yields easing
to 2.58 percent from 2.60 percent on Thursday. That was the
lowest since July 24, according to Reuters data.
But the partial government shutdown is seen as having damped
economic growth, postponing the point at which the Fed would
begin trimming its $85 billion a month in bond purchases.
Most market participants had expected the Fed to announce it
would trim purchases at its September meeting. Now many believe
that won't happen until next year.
"There's a good chance we'll see taper delayed at every Fed
meeting for at least year because it will take at least that
long to get the unemployment rate to just below the peak
unemployment rate of the last recession which was 6.3 percent,"
said Robert Tipp, chief investment strategist at Prudential
Fixed Income with $400 billion in assets under management, in
Newark, New Jersey.
Two top Fed officials said on Thursday the Fed would likely
defer any decision to trim its bond purchases until at least
Investors are also betting the Fed won't raise interest
rates until April 2015.
Still, there was residual caution after the latest conflict
amid wariness that the circus could start over in January when
Congress again must act to keep the government open.
Consequently, the overnight general collateral repo rate, at
0.15 percent, was still higher than it was prior to the debt
ceiling standoff, noted John Canavan, Stone & McCarthy Research
Associates in Princeton, New Jersey.
Overnight, five- and seven-year notes briefly moved below
their early October low yields around 1.30 percent and 1.95
"The 10-year note and 30-year bond followed overnight as the
10-year bulled through the 2.58 percent area low from early this
month, and the bond through the 3.65 percent/3.64 percent low
yield from late September," Canavan said. "That attracted a wave
of technical buying, with demand from commodity trading
advisors, Asian real money, and central banks."
Tipp said 10-year yields, on balance, would continue to
settle downward in the 2.5 percent to 3 percent range they have
inhabited for the last three months.
"If the Fed led by Janet Yellen puts off tapering and keeps
buying, that yield range could pretty easily come down another
25 basis points over the next two to six months," he said.
In the coming week, the market faces the resumption of
government economic data releases. Key employment data from
September will finally be released on Tuesday, October 22. Had
the government not shut down, the report would have been
released on October 4.
Meanwhile, Fed officials are out on the hustings. Fed
Governor Daniel Tarullo, Chicago Fed President Charles Evans,
New York Fed President William Dudley and Fed Governor Jeremy
Stein are all speaking in the afternoon.
Only Chicago Fed President Evans, however, is scheduled to
speak about current economic conditions and monetary policy.
The Fed bought $1.555 billion in Treasuries maturing between
Feb. 15, 2036 and Feb. 15, 2043 as part of its plan to stimulate
the economy and reduce unemployment.