December 24, 2018 / 7:42 PM / 9 months ago

TREASURIES-U.S. yields drop as anxious investors flock to bonds

    * Mnuchin's call to banks raise concerns about financial
    * U.S. 2-year yield records biggest daily drop since May
    * U.S. sells $40 bln in 2-year notes to soft demand 
    * U.S. bond market closes early before Christmas 

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Dec 24 (Reuters) - Yields on 10-year U.S. Treasury
notes slipped on Monday to  eight-month lows as investors,
unsettled by dramatic stock market losses and further U.S.
interest rate increases, piled more money into low-risk
government debt.
    Two-year yields dropped the most in one day since May, to
the lowest level since July, as traders reduced expectations the
Federal Reserve will raise interest rates further in 2019.
    Trading volume was light ahead of Tuesday's Christmas
holiday. The U.S. bond market shut early at 2 p.m. EST (1900
GMT) and will stay closed on Tuesday. 
    A partial U.S. government shutdown that began on Saturday
heightened anxiety among traders and fund managers and likely
will stoke demand for this week's $113 billion of coupon-bearing
Treasuries, analysts said.
    "It doesn't help things at all," Mike Lorizio, head of
Treasuries and agencies trading at Manulife Asset Management, 
said of the government shutdown. "We are seeing a classic
flight-to-quality move into Treasuries."
    Mick Mulvaney, the White House budget director and acting
chief of staff, said on Sunday the partial federal government
shutdown could continue into January as Democratic lawmakers and
President Donald Trump hit an impasse over the latter's demand
for funding for a border wall.
    Analysts said other developments in Washington have eroded
investor confidence in stocks and other risky assets.
    News that Trump privately discussed the possibility of
firing Fed Chairman Jerome Powell and the surprise resignation
of Defense Secretary Jim Mattis also have roiled financial
    Trump continued his criticism of the Fed. On Monday, he said
in a tweet, "The only problem the economy has is the Fed."
    U.S. Treasury Secretary Steven Mnuchin spoke on Sunday with
the heads of the six biggest U.S. banks to confirm they have
enough cash to lend following the biggest weekly drop of the
benchmark S&P 500 index since the Great Depression.

    Mnuchin's call caused confusion, instead of soothing
financial markets as intended, analysts said.
    "That begs the question is there something going on?" said
Chris Ahrens, chief market strategist at First Empire
Securities. "The perception of (Mnuchin's call) is not helpful."
    The benchmark 10-year Treasury yield was down
more than 5 basis points at 2.7365 percent after touching 2.7330
percent, which was the lowest since April 2, Refinitiv data
    The two-year yield declined 8 basis points for
its steepest daily fall since May 29. It hit 2.5470 percent, the
lowest since July 9.
    The gap between two-year and 10-year yields
narrowed to 8.9 basis points, the tightest level in over a
decade, before bouncing back to 17.7 basis points, the widest in
three weeks.
    The Treasury sold $40 billion in two-year notes to soft
investor demand due to that maturity's drop in yield in recent
    The Treasury will auction $41 billion of five-year debt on
Wednesday and $32 billion in seven-year securities on Thursday.
December 24 Monday 2:16PM New York / 1916 GMT
 US T BONDS MAR9               145-23/32    29/32     
 10YR TNotes MAR9              121-136/256  16/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.3425       2.3882    0.002
 Six-month bills               2.4425       2.5064    -0.029
 Two-year note                 100-90/256   2.5614    -0.082
 Three-year note               100-52/256   2.5534    -0.075
 Five-year note                101-100/256  2.5725    -0.069
 Seven-year note               101-96/256   2.6562    -0.062
 10-year note                  103-88/256   2.7365    -0.056
 30-year bond                  107-100/256  2.9987    -0.028
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       17.70        3.00      
 30-year vs 5-year yield       41.00        2.35      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        15.00         1.50    
 U.S. 3-year dollar swap        10.25        -0.25    
 U.S. 5-year dollar swap         7.75        -1.00    
 U.S. 10-year dollar swap        2.00        -1.50    
 U.S. 30-year dollar swap      -14.50        -1.50    

 (Reporting by Richard Leong
Editing by Bill Trott and Jonathan Oatis)
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