August 26, 2019 / 6:51 PM / 4 months ago

TREASURIES-U.S. yield curve inverts further amid supply, trade worries

    * Trump on China: "I think they want to make a deal very
badly"
    * U.S. to sell $113 bln in fixed-rate, coupon-bearing debt
    * U.S. durable goods orders unexpectedly rise in July

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Aug 26 (Reuters) - The U.S. yield curve inverted
further on Monday with yields on shorter-dated yields rising
more than longer-dated ones, as upcoming supply of
shorter-maturity Treasury debt outweighed the easing of trade
tensions between China and the United States.
    The U.S. Treasury Department will sell $113 billion in
fixed-rate debt supply this week, starting with a $40 billion
auction of two-year notes on Tuesday.

     Benchmark 10-year Treasury yields slid to 1.443% earlier on
Monday, their lowest since July 2016, as another round of
tit-for-tat tariffs between the world's biggest economies last
week  touched off a wave of safe-haven demand for low-risk
government bonds. 
    On Friday, U.S. President Donald Trump announced an
additional duty on some $550 billion of targeted Chinese goods,
hours after China unveiled retaliatory tariffs on $75 billion
worth of U.S. goods.
    By Monday, Trump and Chinese leaders sought to ease trade
tensions that triggered steep stock market sell-offs around the
world. Trump told a press conference after the G7 summit in
France: "I think they want to make a deal very badly."

    Analysts were not as optimistic.
    "It's a lot of mixed messages," said Gennadiy Goldberg,
senior interest rates strategist at TD Securities. "It's hard to
trade in this environment purely on data."
    Domestic orders for durable goods unexpectedly rose in July
but shipments fell by the most in nearly three years, suggesting
capital investment remained sluggish.
    On the open market, yields on two-year notes fell
as low as 1.449%, their lowest since September 2017. They
subsequently moved up 2.00 basis points to 1.549%.
    Ten-year Treasury yields were 1.540%, 1.30 basis
points higher on the day, rebounding from a three-year low of
1.443% set earlier on Monday.
    The inversion between two-year and 10-year yields
 deepened to -1.7 basis points from -0.2 basis
points late on Friday.
    The yield curve has often inverted prior to recent U.S.
recessions.
    The U.S.-China trade war has put the Federal Reserve in a
tough spot as policymakers cite its disruption of global
business activities as a risk to the domestic economy. 
    On Friday, Fed Chair Jerome Powell said the central bank
would "act as appropriate" to sustain the longest-ever U.S.
economic expansion. But he did not pledge that the Fed was ready
to embark on a series of interest rate cuts.
    Interest rates futures implied traders expect the Fed to
lower rates by a quarter point at its Sept. 17-18 policy
meeting, following its first rate decrease since 2008 in July. 
    Fed funds contracts suggested the Fed would cut rates at
least one more time after September, CME Group's FedWatch
program showed.
August 26 Monday 2:39PM New York / 1839 GMT
                               Price                  
 US T BONDS SEP9               165-10/32    -7/32     
 10YR TNotes SEP9              130-212/256  -4/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.95         1.9918    0.028
 Six-month bills               1.8425       1.8903    0.020
 Two-year note                 100-98/256   1.5473    0.018
 Three-year note               100-24/256   1.4675    0.018
 Five-year note                101-134/256  1.4286    0.020
 Seven-year note               102-144/256  1.4843    0.011
 10-year note                  100-204/256  1.5384    0.011
 30-year bond                  105-16/256   2.0238    0.000
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       -1.00        -1.15     
 30-year vs 5-year yield       59.40        -1.30     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        -1.50         0.25    
 spread                                               
 U.S. 3-year dollar swap        -3.75         0.00    
 spread                                               
 U.S. 5-year dollar swap        -5.50         0.25    
 spread                                               
 U.S. 10-year dollar swap       -8.75         0.50    
 spread                                               
 U.S. 30-year dollar swap      -39.00         1.00    
 spread                                               
 

    
 (Reporting by Richard Leong in New York and Dhara Ranasinghe in
LONDON; Editing by Dan Grebler and Tom Brown)
  
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