September 21, 2018 / 7:50 PM / 8 months ago

TREASURIES-U.S. yields dip, tracking Europe, as Brexit talks stumble

    * U.S. 2-year yield hits 10-year high
    * Focus on FOMC next week
    * Brexit unresolved as UK, EU at impasse

 (Adds comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 21 (Reuters) - U.S. long-dated Treasury
yields slipped on Friday, in tandem with those in Europe, as
negotiations over Britain's exit from the European Union
appeared to stall. 
    U.S. 2-year yields, however, remained unaffected by global
factors as they hit a fresh 10-year high in the run-up to an
expected rate increase at next week's Federal Reserve monetary
policy meeting.
    Yields have been on an uptrend the last few weeks after data
showed U.S. wages spiking last month, elevating concerns about
inflation, and boosting expectations the Fed could raise rates a
few more times this year and in 2019.
    Britain's exit from the European Union, known as Brexit, has
caught investors' attention, after British Prime Minister
Theresa May on Friday delivered a critical assessment of
negotiations with the EU. 
    May said she will not break up her country or disrespect the
result of the referendum that voted to leave the European
grouping, noting that no deal is better than a bad deal.

    "If the whole Brexit goes to hell, that would be bullish for
Treasuries and could precipitate a whole risk-off trade," said
Jerry Paul, senior vice president and fixed income portfolio
manager at ICON Advisers in Denver.
    The British 10-year government bond yield fell to 1.548
percent from Thursday's 1.586 percent after May's
comments, while Germany's 10-year yield was lower at 0.461
percent, from 0.479 percent the previous session.
    Treasury yields fell in sympathy, with U.S. 10-year yields
dipping to 3.068 percent in afternoon trading, from
3.078 percent late on Thursday.
    U.S. 30-year yields were at 3.204 percent, down
from Thursday's 3.214 percent. 
    U.S. 2-year yields, meanwhile, were at 2.808 percent
, unchanged from Thursday's levels, after earlier
touching a more than 10-year high at 2.825 percent.
    The Brexit situation has become a distraction to a Treasury
market that is bracing for further rate increases from the Fed,
which meets next week.
    "A 25-basis point hike has been priced in for months, so no
surprises there," said Action Economics in its blog. "Of more
importance will be the dot plot and forward guidance, both of
which are likely to support a continuation of gradual policy
    Fed officials' median projection on the number of rate
increases is commonly referred to as its dot-plot.
    Action Economics said based on growth and inflation numbers,
the dot plot median should still hold at four rate hikes this
year and three in 2019.
    Fed funds futures are pricing in a roughly 80 percent chance
for a tightening at the December meeting, with implied rates
showing a 50-50 probability of another hike as soon as the March
2019 Fed meeting, the research firm said.
    Next week is heavy on U.S. economic data, which along with 
the Fed's rate decision, could prove to be crucial in
determining the path for interest rates this year and in 2019.
      September 21 Friday 3:33PM New York / 1933 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1325       2.1733    0.004
 Six-month bills               2.3175       2.3769    0.005
 Two-year note                 99-170/256   2.8041    -0.004
 Three-year note               99-154/256   2.8906    -0.008
 Five-year note                99-20/256    2.9519    -0.010
 Seven-year note               98-72/256    3.0265    -0.013
 10-year note                  98-96/256    3.0665    -0.012
 30-year bond                  96-20/256    3.2048    -0.009
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        17.50        -0.50    
 U.S. 3-year dollar swap        15.25        -0.25    
 U.S. 5-year dollar swap        12.25         0.00    
 U.S. 10-year dollar swap        6.00        -0.25    
 U.S. 30-year dollar swap       -6.75        -0.25    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler
and Susan Thomas)
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