September 21, 2018 / 3:05 PM / 7 months ago

TREASURIES-U.S. yields fall, in line with Europe, as Brexit worries weigh

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 21 (Reuters) - U.S. long-dated Treasury
yields slipped on Friday, in tandem with those in Europe, as
Brexit negotiations stalled between the UK and the European
    U.S. 2-year yields, however, remained unaffected by global
factors as they hit a fresh 10-year high in the run-up to an
expected rate increase at next week's Federal Reserve monetary
policy meeting.
    Brexit has caught investors' attention, after British Prime
Minister Theresa May on Friday delivered a critical assessment
of negotiations with the EU. 
    May said she will not break up her country or disrespect the
result of the referendum that voted to leave the European
grouping, noting that no deal is better than a bad deal.

    "If the whole Brexit goes to hell, that would be bullish for
Treasuries and could precipitate a whole risk-off trade," said
Jerry Paul, senior vice president and fixed income portfolio
manager at ICON Advisers in Denver.
    The British 10-year government bond yield fell to 1.545
percent from Thursday's 1.586 percent following
May's comments, while Germany's 10-year yield was lower at 0.456
percent, from 0.479 percent the previous session.
    Treasury yields fell in sympathy, with U.S. 10-year yields
sliding to 3.066 percent in late morning trading,
from 3.078 percent late on Thursday.
    U.S. 30-year yields were at 3.202 percent, down
from Thursday's 3.214 percent.
    U.S. 2-year yields, meanwhile, were at 2.812 percent
, up from 2.808 percent on Thursday, after earlier
touching a more than 10-year high at 2.825 percent.
    The Brexit situation has become a distraction to a Treasury
market that is bracing for further rate increases from the Fed.
    "The general trend is for short rates to go higher and I
tend to believe that the yield curve will continue to flatten,"
Paul said. "We could go higher on the 10-year over the duration
of 12 months, maybe 3.25 percent, maybe as high as 3.5 percent."
    That said, Paul has started to buy U.S. Treasuries, with the
yield above 3 percent on U.S. 10-year notes.
    "I don't think there's a big risk for me if the rate falls
to 2.5 percent, but you never know. We're pretty cautious on
making big interest rate bets," he added.
    Next week is heavy on U.S. economic data, which along with 
the Fed's rate decision, could prove to be crucial in
determining the path for interest rates this year and in 2019.
    The market will look forward to release of the final U.S.
gross domestic product number for the second quarter, as well as
readings on confidence, consumption, housing, advance trade and
durable orders.
      September 21 Friday 10:43AM New York / 1443 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1325       2.1733    0.004
 Six-month bills               2.315        2.3743    0.002
 Two-year note                 99-166/256   2.8125    0.004
 Three-year note               99-148/256   2.8989    0.000
 Five-year note                99-16/256    2.9554    -0.007
 Seven-year note               98-68/256    3.029     -0.010
 10-year note                  98-96/256    3.0665    -0.012
 30-year bond                  96-24/256    3.204     -0.010
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        17.50        -0.50    
 U.S. 3-year dollar swap        15.25        -0.25    
 U.S. 5-year dollar swap        12.25         0.00    
 U.S. 10-year dollar swap        6.25         0.00    
 U.S. 30-year dollar swap       -6.25         0.25    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler)
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