March 25, 2019 / 1:34 PM / 6 months ago

TREASURIES-Benchmark yields near one-year lows as Fed policy in focus

    * Dovish tilt by Fed main market driver
    * Three-month, 10-year yield curve modestly inverted
    * Treasury to sell $113 bln notes this week

    By Karen Brettell
    NEW YORK, March 25 (Reuters) - Benchmark 10-year Treasury
yields held near more than one-year lows on Monday while the
yield curve between three-month bills and 10-year notes was
modestly inverted 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
September.             
    The yield curve inverted on Friday after disappointing
manufacturing data in the United States and Germany further
raised concerns about the slowing global economy. 
    An unexpected improvement in German business morale in March
on Monday, however, briefly helped to lift yields off their
lows.             
    After rallying by around 20 basis points last week a new
catalyst may be needed to send 10-year yields much below current
levels.
    “I think it’s hard for 10-year notes to continue to rally
much further through this without some more confirming signals
that the economy is actually in bad shape,” said Tom Simons, a
money market economist at Jefferies in New York.
    The yields             were last 2.444 percent after falling
to 2.418 percent on Friday, the lowest since January 2018. 
    The yield curve between three-month notes and 10-year yields
was inverted by around one basis point, slightly less than
levels reached on Friday. 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 Simons.
    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)
  
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