October 24, 2018 / 7:42 PM / 2 months ago

TREASURIES-U.S. yields fall on Wall Street drop, political uncertainty

    * Equity volatility boosts demand for Treasuries
    * News of suspicious packages bolsters safe-haven bids
    * Fed's Mester says she sees no sign of U.S. recession
    * U.S. 5-year auction was lackluster

 (Recasts, adds new comment, auction results, updates prices)
    By Gertrude Chavez-Dreyfuss and Karen Brettell
    NEW YORK, Oct 24 (Reuters) - U.S. benchmark 10-year Treasury
yields fell to three-week lows on Wednesday, weighed down by
weakness in stocks and ongoing political uncertainty ahead of
the U.S. congressional elections.
    U.S. five-year and seven-year yields dropped to three-week
lows as well, while those on two-year notes fell to a nearly
two-week trough.
    "Declines in the equity market are reflective of a
potentially deteriorating U.S. growth outlook, or increasing
uncertainty about the growth outlook which would correspond to a
lower path of policy for Treasuries," said Jon Hill, interest
rates strategist, at BMO Capital in New York.
    The benchmark S&P 500 was on a six-day losing streak
and has fallen in 14 of this month's 18 trading days on worries
ranging from rising borrowing costs and bond yields to Italy's
budget, and upcoming U.S. midterm elections.
    Stock volatility has raised some concerns that equity
markets and the economy may not be as strong as previously
thought, which could temper the Federal Reserve's eagerness to
raise interest rates. Investors also fear growing inflation
pressures.
    But on Wednesday, Cleveland Federal Reserve President
Loretta Mester, a voting member of the Federal Open Market
Committee this year, said there were no signs of a pending
recession.
    Treasuries also garnered bids as police on Wednesday
intercepted suspected pipe bombs sent to former U.S. President
Barack Obama, former presidential candidate Hillary Clinton and
other high-profile Democrats, in what New York officials
described as an act of terrorism.
    Aside from U.S. politics, growth concerns about China,
disappointing corporate earnings and tensions between Italy and
the European Union over Italy's spending plans sent stock
markets tumbling on Tuesday, and prompted demand for low risk
U.S. government bonds.
    In afternoon trading, benchmark 10-year note yields fell to
3.105 percent from 3.166 percent late on Tuesday.
Ten-year yields earlier fell to 3.102 percent, a three-week low.
    U.S. 30-year yields dropped to 3.333 percent
from Tuesday's 3.364 percent.
    On the short end of the curve, U.S. two-year yields declined
to 2.835 percent, its lowest since Oct. 12. They were last at
2.838 percent, down from 2.892 on Tuesday.
    Wednesday's lackluster U.S. five-year auction lifted
intermediate yields off their lows. The note picked up a high
yield of 2.977 percent, slightly up from the expected yield at
the bid deadline. Bids totaled $89.8 billion for a soft 2.30
bid-to-cover ratio, a gauge of demand, down from both the 2.39
last month and the 2.48 average.
    Direct bidders also took 1.9 percent, the smallest since
2009, according to Action Economics.
    
      October 24 Wednesday 3:38PM New York / 1938 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.29         2.3353    -0.005
 Six-month bills               2.4125       2.4762    -0.003
 Two-year note                 100-18/256   2.8386    -0.053
 Three-year note               99-246/256   2.8886    -0.060
 Five-year note                99-180/256   2.9398    -0.069
 Seven-year note               99-212/256   3.0275    -0.069
 10-year note                  98-16/256    3.1054    -0.061
 30-year bond                  93-188/256   3.3331    -0.031
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        20.00         0.50    
 spread                                               
 U.S. 3-year dollar swap        18.75         1.00    
 spread                                               
 U.S. 5-year dollar swap        15.00         0.75    
 spread                                               
 U.S. 10-year dollar swap        6.75         0.25    
 spread                                               
 U.S. 30-year dollar swap      -10.50        -1.25    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss and Karen Brettell;
Editing by Richard Chang)
  
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