October 28, 2019 / 2:48 PM / 25 days ago

TREASURIES-Brexit extension drives risk appetite, lifts U.S. yields

    By Kate Duguid
    NEW YORK, Oct 28 (Reuters) - U.S. Treasury yields rose on
Monday morning after the European Union agreed to a three-month
flexible delay of Britain's departure from the European Union.
    The extension of the Oct. 31 deadline comes amid uncertainty
about Brexit, with British politicians no closer to reaching a
consensus on how, when or even if the divorce should take place.
Allowing Britain more time to come to a consensus lowers chances
of a no-deal exit, reducing uncertainty and with it, investor
demand for safe-haven investments like U.S. government bonds. 
    The benchmark 10-year yield was last up 5.7
basis points to 1.858%, the biggest move across maturities. 
    With "the risk-positive impulse from the Brexit extension,
(it) makes sense that rates are coming back higher. From a
technical lens, we broke a couple pretty significant support
points, which suggests that 10s could sell off further from
here. In particular, we're watching that 1.90% level," said Jon
Hill, U.S. rate strategist at BMO Capital Markets.
    Boris Johnson, who became prime minister in July by pledging
to deliver Brexit on Oct. 31, was compelled to request a
postponement after he was defeated in parliament over the
sequencing of the ratification of his deal.
    In the United States, at the conclusion of its two-day
policy meeting set for Wednesday, the Federal Open Market
Committee is widely expected to cut interest rates by 25 basis
points for the third time this year. 
    Trader expectations of an October cut were 94.1% on Monday,
compared with 89.8% a week prior, according to CME Group's
FedWatch tool. The two-year Treasury yield, which
reflects investor expectations of changes in interest-rate
policy, was up 3.7 basis points to 1.664%.
    But some analysts are expecting a hawkish statement to
accompany the cut, suggesting the bank will pause rate cuts
after October. 
    "The base case is something like a hawkish cut, by which
they cut one more time, that sets a 75-basis-point parallel to
the late 90s. And then they try to set up being on pause from
here. I don't expect them to seriously commit to not cutting
again. Instead they'll try to keep flexibility. But at least
moderate expectations for a fourth cut in December," said Hill.
    In spite of some sell-off due to Brexit, the Treasury market
on the whole was quiet ahead of the FOMC as well as the U.S.
employment report on Friday, with volume at the lowest since
Oct. 14, which many people in the United States take as a
holiday.  

    October 28 Monday 10:29AM New York / 1429 GMT
                               Price                  
 US T BONDS DEC/d              158-11/32    -33/32    
 10YR TNotes DE/d              129-28/256   -14/32    
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.6425       1.6765    0.002
 Six-month bills               1.6375       1.6783    0.015
 Two-year note                 99-173/256   1.6655    0.039
 Three-year note               99-38/256    1.6708    0.047
 Five-year note                99-34/256    1.6816    0.055
 Seven-year note               99-12/256    1.7704    0.056
 10-year note                  97-236/256   1.8579    0.057
 30-year bond                  97-236/256   2.3473    0.054
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       19.10        1.60      
 30-year vs 5-year yield       66.40        -0.20     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.00        -0.75    
 spread                                               
 U.S. 3-year dollar swap        -1.75        -0.50    
 spread                                               
 U.S. 5-year dollar swap        -3.50        -0.50    
 spread                                               
 U.S. 10-year dollar swap       -8.75        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -38.75        -0.25    
 spread                                               
 

 (Reporting by Kate Duguid; editing by Jonathan Oatis)
  
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