January 24, 2020 / 8:50 PM / a month ago

TREASURIES-U.S. yields drop as new virus fears escalate

    * U.S. 10-year, 30-year yields drop to multi-month lows
    * U.S. 2-year note yields fall to two-week lows
    * U.S. yield curve flattens again, tightest gap in 5 weeks
    * FOMC meets next week, likely to keep rates unchanged

 (Adds new comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 24 (Reuters) - U.S. Treasury prices advanced
on Friday, pushing yields lower for a fourth straight session,
as news of the latest coronavirus spreading outside China
continued to undermine risk appetite and spur demand for
safe-haven assets.
    U.S. 30-year yields declined to a nearly three-month low,
while those on benchmark 10-year notes dropped to more than
two-month troughs. U.S. two-year notes also slid, dropping to a
two-week low.
    U.S. 10-year yields have lost nearly 15 basis points this
week, their largest weekly drop in about 3-1/2 months.
Thirty-year yields, meanwhile, have fallen roughly 16 basis
points this week, the biggest weekly decline in four months.
    As rates fell, the yield curve flattened again on Friday as
market sentiment took a hit amid a host of unknowns about the
Chinese coronavirus. The spread between the two-year and 10-year
note yields contracted to as low as 18.78 basis points
, the narrowest gap in five weeks.
    "The virus clearly in the short term has spooked the
market," said Gregory Faranello, head of U.S. rates at Amerivet
Securities in New York. 
    On Friday, China shut part of the Great Wall and suspended
public transport in 10 cities, stranding millions of people at
the start of the Lunar New Year holiday. Authorities rush to
contain a virus that has killed 26 people and infected more than
800 already.
    The virus has also spread to the United States, Asia, and
parts of Europe.
    "The economic impact of the Wuhan coronavirus is ... (an)
unknown with potential downside skew. The quarantine of Wuhan
and surrounding cities is already restricting travel, and fear
of exposure could further restrict economic activity," said
Chris Low, chief economist, at FHN Financial.
    It  may not constitute a material threat to growth forecasts
if contained, Low said. But he said experts worry that it may be
too late to prevent the disease from going global.
    "If that happens, growth will weaken worldwide. Any recovery
after the virus is contained is not clear this early in the
process," Low added.
    In afternoon trading, U.S. 10-year yields fell
to 1.682%, from 1.739% late on Thursday. Earlier in the session,
10-year yields fell to more than two-month lows of 1.67%.
    Yields on U.S. 30-year bonds were at 2.14%, down
from 2.182% on Thursday. Thirty-year yields earlier fell to
nearly three-month troughs of 2.121%.
    On the short end of the curve, U.S. two-year yields fell to
1.494% from Thursday's 1.518%, after hitting a
two-week low of 1.478% earlier in the session.
    The Federal Reserve is expected to meet next week for a
monetary policy meeting and will likely hold interest rates
steady.
    
      January 24 Friday 3:30 PM New York/2030 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.5          1.5305    -0.025
 Six-month bills               1.5075       1.5441    -0.018
 Two-year note                 100-63/256   1.4947    -0.023
 Three-year note               100-14/256   1.481     -0.032
 Five-year note                101-32/256   1.5121    -0.043
 Seven-year note               100-232/256  1.6111    -0.048
 10-year note                  100-132/256  1.6926    -0.046
 30-year bond                  105-16/256   2.1442    -0.038
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         6.00        -0.25    
 spread                                               
 U.S. 3-year dollar swap         3.50         0.00    
 spread                                               
 U.S. 5-year dollar swap         0.50         0.00    
 spread                                               
 U.S. 10-year dollar swap       -5.25         0.00    
 spread                                               
 U.S. 30-year dollar swap      -31.75        -0.25    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan
Oatis and Tom Brown)
  
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