March 25, 2019 / 6:14 PM / a month ago

TREASURIES-Benchmark yields lowest since Dec 2017 as Fed policy in focus

 (Adds quotes, updates prices)
    * Dovish tilt by Fed main market driver
    * Three-month, 10-year yield curve inverts further
    * Treasury to sell $113 bln notes this week

    By Karen Brettell
    NEW YORK, March 25 (Reuters) - Benchmark 10-year Treasury
yields fell to their lowest levels since December 2017 on Monday
while the yield curve between three-month bills and 10-year
notes inverted further as investors evaluated last week’s dovish
pivot by the Federal Reserve.
    The U.S. central bank on Wednesday stunned investors by
abandoning projections for any interest rate hikes this year and
saying it would halt the steady decline of its balance sheet in
    The yield curve inverted on Friday after disappointing
manufacturing data in the United States and Germany further
raised concerns about the slowing global economy.
    On Monday, "it is a follow through trade from last week,"
said Ian Lyngen, head of U.S. rates strategy at BMO Capital
Markets in New York.
    Weaker stock markets and concerns about weakening
international growth supported the trade. That said, "it is a
disproportionately large rally given what we are seeing going on
in risk assets," Lyngen added.
    It also comes despite an unexpected improvement in German
business morale in March, which briefly helped to lift yields
off their lows.             
    Ten-year notes             gained 18/32 in price to yield
2.393 percent, down from 2.455 percent on Friday.
    The yield curve between three-month notes and 10-year yields
was inverted by around five basis points. The inversion, if it
persists, is seen as a reliable indicator that a recession is
likely in one to two years.
    Typically, however, the curve will chop around for some time
before confirming an economic downturn. 
    Unprecedented central bank stimulus may have also altered
the curve dynamics, making an inversion a less clear signal of
economic weakness than in the past. 
    “We’re examining yield curve relationships in an environment
where the Fed still has enormous control over the long end of
the curve, given how much they own on their balance sheet, and
we’re dealing with a very accommodative global policy regime as
well,” said Tom Simons, a money market economist at Jefferies in
New York.
    Chicago Federal Reserve Bank President Charles Evans said on
Monday it was understandable for markets to be nervous when the
yield curve flattened, though he was still confident about the
U.S. economic growth outlook.             
    The Treasury Department will sell $113 billion in
coupon-bearing supply this week, including $40 billion in
two-year notes on Tuesday, $41 billion in five-year notes on
Wednesday and $32 billion in seven-year notes on Thursday.

 (Editing by Susan Thomas and Chizu Nomiyama)
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