February 5, 2019 / 8:16 PM / in 5 months

TREASURIES-U.S. yields retreat, tracking Fed rate outlook

    * U.S. service sector index comes in lower than expected
    * U.S. yield curve flattens
    * U.S. three-year note auction shows solid results

 (Adds comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 5 (Reuters) - U.S. Treasury yields fell on
Tuesday, with the 10-year sliding from one-week highs, as the
market priced in the Federal Reserve's dovish interest rate view
amid an uncertain global economic outlook.
    U.S. two-year yields also declined from one-week peaks,
while 30-year yields dropped after rising for two straight days.
    "There's a little bit of intra-day volatility, but yields
are consolidating around levels that are more consistent with
the new position at the Fed," that it could effectively hold
rates steady over the next six months, said John Herrmann, rates
strategist at MUFG Securities in New York.
    The Fed last week struck a cautious tone on the U.S.
economy, suggesting it will pause its rate-hike cycle, or even
ease monetary policy if the economy warrants it. Many economists
believe, however, the Fed could hike one more time this year.  
    Herrmann believes the U.S. economy could decelerate this
year as the Trump administration's fiscal initiatives run out.
"Last year's strong economy is behind us."
    Data showing a weaker-than-expected U.S. service sector
index of 56.7 affirmed a softer economic outlook, with new
orders falling to a one-year low.
    "The weak international backdrop is clearly playing a role,
with the new export orders index falling even more sharply,"
said Michael Pearce, senior U.S. economist, Capital Economics in
New York.
    "We think this is a sign to come, as the impact of the Fed's
rate hikes last year feeds through to economic activity, just as
the boost from fiscal stimulus fades further," he added.
    Tuesday's auction of $38 billion in U.S. three-year notes,
meanwhile, showed solid demand. The offering was priced at 2.502
percent, the lowest for this maturity at an auction since last
April, Treasury data showed.
    There were $97.0 billion in bids for a 2.55 bid-to-cover
ratio, a gauge of demand, which a little better than last
month's weak 2.44.
    "Solid auction supports stronger short U.S. Treasury
prices," said Jim Vogel, interest rates strategist, at FTN
Financial in Memphis, Tennessee. "It's the first confirmation of
'new' Fed thinking since last Thursday."
    In afternoon trading, U.S. 10-year note yields fell to 2.70
percent, down from 2.724 late on Monday.
    U.S. 30-year bond yields were also down at 3.032 percent
, from 3.06 percent on Monday.
    On the short end, U.S. 2-year yields were down at 2.524
percent, compared with Monday's 2.532 percent.
    The yield curve flattened a little on Tuesday, with the U.S.
10-year and U.S. 2-year note spread falling to 17.2 basis
points, retracing auction-related steepening on Monday.
      Tuesday, Feb. 5 at 1503 EST (2003 GMT):
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.37         2.4176    -0.010
 Six-month bills               2.4375       2.5022    -0.005
 Two-year note                 99-243/256   2.5263    -0.006
 Three-year note               99-246/256   2.5136    -0.011
 Five-year note                99-234/256   2.5184    -0.016
 Seven-year note               100-32/256   2.6053    -0.015
 10-year note                  103-140/256  2.7091    -0.015
 30-year bond                  106-132/256  3.0406    -0.019
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        14.25         0.25    
 U.S. 3-year dollar swap        10.75         0.25    
 U.S. 5-year dollar swap         8.75         0.25    
 U.S. 10-year dollar swap        2.25         0.00    
 U.S. 30-year dollar swap      -18.75         0.25    
 (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Richard Leong; Editing by Phil Berlowitz and Susan Thomas)
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