February 28, 2020 / 5:03 PM / a month ago

TREASURIES-Virus concerns stoke buying; 2-year yield below 1% for first time since 2016

 (Updates with market activity, analyst comment, remarks from
Fed's Bullard)
    By Ross Kerber and Dhara Ranasinghe
    BOSTON / LONDON, Feb 28 (Reuters) - Global investors fleeing
risky assets due to worries about economic damage from the
coronavirus outbreak kept buying U.S. Treasuries on Friday,
pressuring central bankers to cut rates by sending the yield on
the two-year note below 1% for the first time since 2016.
    Yields on longer-term Treasuries were also down sharply,
with the yield on the  benchmark 10-year note down
12.3 basis points in midday trading to 1.1764%. Just before
noon, the note's yield was 1.1453%, marking a record low for the
fourth consecutive day.
    Six countries reported their first cases of the coronavirus
as the world prepared for a pandemic and investors fearing a
global recession dumped equities.
    With world stock markets set for their biggest weekly
decline since the 2008 global financial crisis, investors
flocked to safe-haven U.S. government bonds.
    The trading also reflected expectations central banks would
cut rates to offset economic shocks.   
    A sharp two-day spike in April federal funds futures
left the implied fed funds rate at 1.34% early Friday. Traders
now see a 100% chance of at least a 25-basis-point cut to the
current 1.50%-1.75% fed funds target rate at the Federal
Reserve's March meeting, according to the CME FedWatch tool.
    In a note to clients, Seaport Global Holdings Managing
Director Tom di Galoma wrote that rate cuts might happen shortly
and be coordinated globally. "Bold call we know, however, there
is severe pressure on central banks to offer equity markets some
relief," he wrote.
    The two-year U.S. Treasury yield was down 16.6
basis points to 0.9368% and at one point was at 0.8913%, its
lowest level since late 2016.
    The two-year yield is seen as a market proxy for fed funds,
and the drop widened the differential with the target rate to
more than 50 basis points, which could add pressure on the Fed
to cut to keep the costs of short-term money aligned.
    The movement also steepened the U.S. Treasury yield curve,
measured as the difference between yields on two- and 10-year
Treasury notes. It was at 24 basis points, up 10 basis points
from Thursday's close.
    However, even though the market is expecting rate cuts, it
is not clear that they would address the root concerns driving
trading, said Subadra Rajappa, head of U.S. rates strategy for
Societe Generale.
    The situation facing Fed policymakers now, she said, is
"more a supply shock than any meaningful slowdown in the
economic data. It puts them in a tough spot. It's not clear that
 rate cuts would have a meaningful impact on stabilizing what is
ultimately a fear factor in the market," she said.
    St. Louis Federal Reserve Bank President James Bullard said
on Friday that the Fed does not need to cut U.S. interest rates
just because markets have priced in aggressive central bank
action, but policymakers will be monitoring events closely
before the upcoming March 17-18 meeting.
      February 28 Friday 11:43AM New York / 1643 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.2775       1.3028    -0.151
 Six-month bills               1.145        1.1707    -0.144
 Two-year note                 100-95/256   0.9368    -0.166
 Three-year note               101-74/256   0.9318    -0.161
 Five-year note                100-188/256  0.974     -0.133
 Seven-year note               100-64/256   1.0878    -0.131
 10-year note                  103-8/256    1.1764    -0.123
 30-year bond                  107-116/256  1.6822    -0.101
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         6.50         3.00    
 U.S. 3-year dollar swap         4.25         3.25    
 U.S. 5-year dollar swap         3.00         1.75    
 U.S. 10-year dollar swap       -4.75         0.75    
 U.S. 30-year dollar swap      -38.00        -0.75    

 (Reporting by Dhara Ranasinghe and Ross Kerber; editing by
Giles Elgood, David Gregorio and Jonathan Oatis)
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