March 15, 2019 / 7:25 PM / 4 months ago

TREASURIES-U.S. 10-year yields sink to more than 2-month low ahead of Fed meeting

    * U.S. manufacturing production falls 0.4 pct in February
    * Focus on FOMC next week: analysts see rates on hold
    * Markets pricing in 38 pct chance of rate cut in 2019

 (Adds comments, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, March 15 (Reuters) - Benchmark 10-year and 2-year
U.S. Treasury yields on Friday dropped to their lowest levels
since early January, weighed down by weaker-than-expected U.S.
economic data that suggested the Federal Reserve will hold
interest rates steady for the rest of the year.
    Expectations that the Federal Reserve will strike a dovish
tone at next week's two-day policy meeting also pressured
yields, analysts said.
    Both 10-year and 30-year U.S. yields have declined in seven
of the last 10 sessions, reflecting a benign inflation outlook
and slowing growth in the world's largest economy.  
    Data showed on Friday that U.S. manufacturing output fell
0.4 percent in February, weakening for a second straight month,
while factory activity in New York state was softer than
expected this month with an index reading of 3.7.
    Following the data, U.S. 3- and 5-year yields briefly
inverted, which could augur ill for the economy.
Some analysts though said the movements between two short-dated
maturities does not really offer a clear insight on the bond
market's economic outlook.
    "The data was broadly disappointing ... and that's why we
have seen this rally continue the way it has," said Ben Jeffery,
analyst at BMO Capital Markets in New York.
    In afternoon trading, U.S. 10-year prices rose, as yields
fell to 2.596 percent from 2.63 percent late on
Thursday. Ten-year yields fell to a more than two-month low of
2.580 percent.
    U.S. 30-year bond yields dropped to 3.023 percent
, from 3.046 percent on Thursday.
    At the short end of the curve, U.S. 2-year yields slipped to
2.446 percent, compared with Thursday's 2.461 percent
, after earlier dropping to 2.430 percent, the lowest
since January 4.
    U.S. yields did inch higher after the better-than-expected
University of Michigan consumer sentiment report, which showed
an index of 97.8, higher than the consensus forecast and the
previous month's reading.
    With the data out of the way, investors are now bracing for
a dovish statement after next week's Federal Reserve Open Market
Committee meeting. 
    Analysts unanimously expect the FOMC to leave policy rates
    TD Securities in a research note said the market has priced
in a 38 percent chance of a 25 basis-point rate cut by the end
of 2019, which it believes is a overly pessimistic assessment.
    "Q1 US data has been weak, but it is far from collapsing,"
TD said. "Further, there were a few one-off shocks in terms of
the shutdown and the weather, which should unwind in the coming
      Friday, March 15 at 1507 EDT (1907 GMT):
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             2.3975       2.445     -0.007
 Six-month bills               2.445        2.5093    -0.013
 Two-year note                 100-28/256   2.4419    -0.019
 Three-year note               99-242/256   2.394     -0.024
 Five-year note                99-230/256   2.3968    -0.033
 Seven-year note               100-20/256   2.4876    -0.037
 10-year note                  100-76/256   2.5907    -0.039
 30-year bond                  99-164/256   3.0182    -0.028
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        11.75         1.00    
 U.S. 3-year dollar swap         9.75         0.75    
 U.S. 5-year dollar swap         6.50         0.25    
 U.S. 10-year dollar swap        1.50         0.50    
 U.S. 30-year dollar swap      -23.00        -0.25    
 (Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan
Oatis and Chizu Nomiyama)
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