June 6, 2019 / 8:18 PM / 2 months ago

TREASURIES-U.S. yield curve flattens as ECB refrains on rate cut

    * ECB pledges to hold negative rates in 2020, sees risks
    * Yields rise after report about U.S. may delay tariffs on
    * U.S. jobless claims suggest solid jobs market before

 (Updates market action, adds graphic)
    By Richard Leong
    NEW YORK, June 6 (Reuters) - The U.S. Treasury yield curve
flattened on Thursday as the European Central Bank committed to
leaving interest rates alone into the first half of 2020,
disappointing traders who had bet on a rate cut.
    Most yields ended the day higher in the wake of a Bloomberg
report that said the United States is weighing whether to delay
tariffs on Mexican imports, which are set to take effect on
    The ECB also allowed banks to borrow at a rate just 10 basis
points above its minus 0.4% deposit rate provided they beat the
ECB's lending benchmarks in a new targeted longer-term
refinancing operation, or TLTRO.
    The combined ECB moves were less aggressive than what some
traders had expected, touching off selling in shorter-dated
German government debt, which in turn spilled over into shorter
Treasury maturities, traders and analysts said.
    "In Europe, the selling came with some pricing in of an ECB
rate cut," said Subadra Rajappa, head of U.S. rates strategy at
SG Corporate & Investment Banking in New York.
    Much of the yield curve flattened, coming off its steepest
level in seven months the day before. The gap between two-year
and 10-year yields narrowed by 4.4 basis points
to 23.30 basis points.
    The U.S. curve steepening had been stoked by bets that the
Federal Reserve would ease monetary policy if the U.S. economy
    Economic worries among investors have stemmed from trade
tensions between the United States and China and other U.S.
trading partners.
    "The market is coming around to the idea that there may a
prolonged trade war and that has implications for growth and
inflation," Rajappa said. 
    This week, a number of Fed policymakers have suggested the
U.S. central bank is open to lower U.S. interest rates if the
economy deteriorates. Interest rate futures implied traders see
up to three Fed rate cuts by year-end.
     In late U.S. trading, benchmark 10-year Treasury yields
 were up 0.80 basis point at 2.131%, erasing an
earlier 3 basis point fall as Wall Street was bolstered by the
Bloomberg report on a probable delay on U.S. tariffs on Mexico.
    U.S. yields hit session lows earlier Thursday in step with
their German counterparts as investors had anticipated the ECB
hinting at cutting rates deeper into negative territory. German
10-year yields tumbled to record low of -0.241%
before retracing to -0.232%.
    On the data front, the U.S. Labor Department said first-time
filings for jobless benefits were unchanged last week, a sign of
a solid labor market.
    The Labor Department's payrolls report for May, due on
Friday at 8:30 a.m. ET (1230 GMT), is seen as critical to
whether the Fed would begin lower borrowing costs.
    Analysts polled by Reuters forecast nonfarm payrolls likely
grew by 185,000 last month, down from 263,000 in April, while
the jobless rate likely held at 3.6%, the lowest since December
June 6 Thursday 3:58PM New York / 1958 GMT
 US T BONDS SEP9               153-17/32    4/32      
 10YR TNotes SEP9              126-232/256  -3/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.265        2.3159    -0.026
 Six-month bills               2.165        2.2192    -0.030
 Two-year note                 100-116/256  1.8908    0.050
 Three-year note               100-196/256  1.8558    0.049
 Five-year note                100-130/256  1.8927    0.030
 Seven-year note               100-188/256  2.0117    0.012
 10-year note                  102-52/256   2.1278    0.005
 30-year bond                  105-72/256   2.6193    -0.014
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       23.50        -4.15     
 30-year vs 5-year yield       72.50        -4.65     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         5.50         0.75    
 U.S. 3-year dollar swap         3.25         1.00    
 U.S. 5-year dollar swap         2.50         1.50    
 U.S. 10-year dollar swap       -1.00         1.25    
 U.S. 30-year dollar swap      -27.50         0.75    
 (Reporting by Richard Leong
Editing by James Dalgleish and Lisa Shumaker)
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