August 27, 2018 / 6:57 PM / 2 months ago

TREASURIES-U.S. bond yields rise on supply, U.S.-Mexico trade deal

    * U.S. sell $36 bln 2-year fixed-rate notes to average
demand 
    * Bond yields seen holding in tight trading range

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Aug 27 (Reuters) - U.S. Treasury yields rose on
Monday as Mexico and the United States reached a deal on
bilateral issues in the renegotiation of the North American Free
Trade Agreement (NAFTA), stoking some selling of safe-haven
Treasuries holdings. 
    Conflicts between Washington and major U.S. trade partners
had some investors betting that global growth could slow in the
second half while the Federal Reserve might pause U.S. rate
hikes.
    Treasury yields also rose as investors and dealers made room
for $36 billion of two-year note supply, the first part of this
week's $104 billion coupon-bearing government debt offerings.
    "You have some selling on supply and some better news on the
trade front," said Thomas Roth, head of U.S. Treasury trading at
MUFG Securities America in New York.
    On light, summer volume, the yield on two-year Treasuries
 was up over 1 basis point at 2.645 percent. The
10-year yield was nearly 2 basis points higher at
2.844 percent.
    Bond yields will likely hold in a tight trading range as
trade concerns are offset solid domestic economic data.
    "You have one piece of the trade puzzle solved," Roth said
of the U.S.-Mexico trade agreement. "But you have a lot of other
pieces with China and Europe. This would keep us rangebound."
    The spread between two-year and 10-year yields
 hovered at its tightest since 2007 after remarks
last Friday from Federal Reserve Chairman Jerome Powell
reinforced expectations that the U.S. central bank will
gradually increase overnight borrowing costs.
    Interest rates futures implied traders expected the Fed
would hike interest rates at least one more time this year.
    Traders fully priced in the likelihood that the Fed would
increase short-term rates a quarter point to 2.00-2.25 percent
at its Sept. 25-26 policy meeting, CME Group's FedWatch program
showed.
    They suggested traders estimated a 70 percent likelihood of
another quarter-point hike at its Dec. 18-19 meeting.
    The two-year yield, which is sensitive to traders' view on
Fed policy, is not far below its decade high of 2.690 percent
set in July.
    Rising short-term yields have appealed to investors seeking
decent return with relatively low risk, analysts said. 
    The Treasury on Monday sold the latest two-year supply
 to average demand.
    It will sell $37 billion of five-year notes
on Tuesday and $31 billion of seven-year notes on
Wednesday.  
    While bond fund managers remained bullish on longer-dated
Treasuries, speculators including hedge funds raised net shorts
on 10-year Treasury futures last week, according to data from
the Commodity Futures Trading Commission released late Friday.

August 27 Monday 2:35 p.m New York / 1835 GMT
                               Price                  
 US T BONDS SEP8               145-4/32     -15/32    
 10YR TNotes SEP8              120-92/256   -5/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.0675       2.1067    0.013
 Six-month bills               2.1925       2.2472    0.005
 Two-year note                 99-246/256   2.6454    0.016
 Three-year note               100-34/256   2.7029    0.019
 Five-year note                100-8/256    2.7429    0.019
 Seven-year note               100-112/256  2.8048    0.020
 10-year note                  100-60/256   2.8477    0.022
 30-year bond                  100-24/256   2.9952    0.020
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       20.10        1.50      
 30-year vs 5-year yield       25.10        0.60      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.00        -0.25    
 spread                                               
 U.S. 3-year dollar swap        16.50        -0.50    
 spread                                               
 U.S. 5-year dollar swap        13.50         0.25    
 spread                                               
 U.S. 10-year dollar swap        7.50         0.00    
 spread                                               
 U.S. 30-year dollar swap       -5.00         0.00    
 spread                                               
 
    
 (Reporting by Richard Leong; Editing by Richard Chang and Lisa
Shumaker)
  
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