October 30, 2019 / 8:16 PM / 19 days ago

TREASURIES-U.S. yields fall after Fed cuts rates

(New throughout, adds analyst quotes)

By Kate Duguid and Ross Kerber

NEW YORK, Oct 30 (Reuters) - U.S. Treasury yields fell on Wednesday after the Federal Reserve cut interest rates for the third time this year, as expected, but signaled that monetary easing could be on hold.

The U.S. central bank lowered the policy rate by a quarter of a percentage point to help the United States weather the global trade war without spiraling into recession, though U.S. economic data have remained steady. The Fed dropped a previous reference in its policy statement that it “will act as appropriate” to sustain the economic expansion - language that was considered a sign of future rate cuts.

The Fed’s “description of the economy was a little stronger than I would have thought. The labor market is strong, job gains solid, household spending rising ..., all that would indicate that they’re emphasizing that everything is good right now,” Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research.

“That would probably indicate that the consensus is not that they would need to cut a whole lot more.”

Yields rose immediately following the announcement, before backtracking as Fed Chair Jerome Powell expressed some flexibility about future cuts during a press conference.

The two-year yield, which reflects market expectations of interest rate policy, had initially risen on the signaled pause in easing. It was last down 3.6 basis points at 1.606%, with the 10-year yield down 6.2 basis points at 1.772%.

The spread between the two- and 10-year yields narrowed to as little as 14.8 basis points, the tightest since mid-October, before widening to 16.4 basis points.

Market participants disagreed about whether the yield curve would invert again, after doing so in August for the first time since 2007. An inversion is a classic economic indicator that has preceded every recession for the past 50 years. In some instances the yield curve has inverted more than once before a downturn.

“It’s definitely possible,” said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments.

“If the data continue to deteriorate, the long end will follow the data lower. And if the Fed doesn’t react then we’ll invert,” he said.

He noted that during the Fed meetings in July and September, the 10-year note yield peaked, suggesting more declines are possible.

Although more flattening could be expected, said Jones, she did not believe the curve would invert because U.S. economic data is unlikely to deteriorate to that degree. (Reporting by Kate Duguid; Editing by Angus MacSwan Editing by Chizu Nomiyama, Jonathan Oatis and Richard Chang)

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