June 19, 2019 / 2:28 PM / 2 months ago

TREASURIES-U.S. yields rise after sharp fall; investors brace for Fed

    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 19 (Reuters) - U.S. Treasury yields rose on
Wednesday, tracking the European market after steep falls the
previous day, as investors rebalanced positions ahead of a
pivotal decision and statement from the Federal Reserve later in
the session.
    U.S. benchmark 10-year yields on Tuesday fell to their
lowest since early September 2017, while 30-year yields hit
their weakest since late October 2016, after European Central
Bank President Mario Draghi hinted at more stimulus if regional
inflation fails to reach its target.
    "People are mostly position-squaring ahead of the Fed
today," said Justin Lederer, Treasury analyst at Cantor
Fitzgerald in New York. "Everything in some shape or form will
change at 2 p.m. when the Fed announces its decision."
    The Federal Open Market Committee is expected to leave
interest rates unchanged, but is likely to change its rate
forecasts and alter the language of the accompanying statement
to set the stage for future easing. 
    Interest rate futures are still pricing in a 20-percent
chance the Fed will cut interest rate on Wednesday, but a much
greater possibility of a move in July, analysts said.
    "With the G20 next week and with what Trump said yesterday
on China, I think the Fed will be a little more cautious to cut
today knowing that there could be some potential progress with a
trade deal," Cantor's Lederer said.
    U.S. President Donald Trump said on Tuesday he had spoken to
Chinese President Xi Jinping and that the two leaders' teams
would restart trade talks after a long lull in order to prepare
for a meeting at the G20 summit later this month.
    In morning trading, U.S. 10-year note yields rose to 2.09%
 from 2.058% late on Tuesday.
    Yields on U.S. 30-year bonds increased to 2.572%
, from 2.552% on Tuesday.
    At the short end of the curve, U.S. 2-year yields were up at
1.896% from Tuesday's 1.862%.
    Action Economics said trading has been a little more
cautious, with some market participants reconsidering the
aggressive rate cuts being priced by the market.
    "We believe the bond market is too aggressive in pricing in
a dovish FOMC, with three 25 basis points in rate cuts expected
this year," Action Economics said. "While the Fed is likely to
remove the 2020 dot showing a rate hike, we don't expect the
median dot to reflect a cut this year or next."
    Fed officials' median projection on the number of rate
increases is commonly referred to as its "dot-plot."
      June 19 Wednesday 10:16 AM New York / 1416 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1725       2.2209    -0.005
 Six-month bills               2.14         2.1995    0.003
 Two-year note                 100-111/256  1.8967    0.035
 Three-year note               99-194/256   1.8337    0.035
 Five-year note                100-158/256  1.8687    0.038
 Seven-year note               101-4/256    1.9678    0.035
 10-year note                  102-140/256  2.0888    0.031
 30-year bond                  106-80/256   2.5711    0.019
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         3.00         0.25    
 U.S. 3-year dollar swap         2.25         0.25    
 U.S. 5-year dollar swap        -1.50         0.00    
 U.S. 10-year dollar swap       -6.00         0.25    
 U.S. 30-year dollar swap      -31.75         0.50    
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Nick Zieminski)
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