April 10, 2019 / 8:21 PM / 5 months ago

TREASURIES-Yields decline after tame core U.S. inflation data

    * U.S. core inflation comes in lower than expected
    * Fed minutes suggest no rate hikes this year 
    * ECB's Draghi highlights downside risks to euro zone
    * U.S. 10-year note auction shows solid demand

 (Adds results U.S. 10-year note auction, Fed minutes, new
comment)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, April 10 (Reuters) - U.S. Treasury yields slid on
Wednesday, as tame underlying U.S. inflation data reinforced
expectations that the Federal Reserve would hold interest rates
steady or cut them once by the end of the year. 
    Lower U.S. yields were also in line with falls in the
European bond market after the European Central Bank affirmed
its easing bias in the midst of downside risks to the eurozone
economy.
    "There is a persistent trend of inflation underperformance
that may soon become problematic for the Fed," said Ian Lyngen,
head of U.S. rates strategy at BMO Capital Markets in New York. 
    Data showed that last month's U.S. core consumer prices, a
key inflation gauge that the Fed monitors, rose 0.1 percent,
lower than expectations of a 0.2 percent increase. Headline
inflation, though, advanced 0.4 percent in March, boosted by
rising gasoline prices and rents.
    Minutes of the last Federal Reserve meeting, also released
on Wednesday, suggested that the U.S. central bank is likely to
leave rates unchanged this year given risks to the economic
outlook from a global slowdown and uncertainty over trade
policies and financial conditions.
    "We have long expected that weaker growth would convince the
Fed to reverse course with 75 basis points of rate cuts by the
middle of 2020, with the first cut probably now coming before
the end of this year," said Andrew Hunter, senior U.S. economist
at Capital Economics in London.
    Further pressuring U.S. yields were downbeat comments on the
economy by European Central Bank President Mario Draghi on
Wednesday.
    The ECB's top official said risks to the euro zone economy
remained tilted to the downside and that headline inflation is
likely to decline over the coming months.
    His comments followed the ECB's dovish turn in March during
its last monetary policy meeting when it restarted its stimulus
program through a new round of cheap loans to banks.
    In afternoon trading, U.S. 10-year note yields fell to
2.472%, down from 2.499% late on Tuesday.
    U.S. 30-year bond yields also dipped to 2.898%
from 2.909% on Tuesday.
    On the short end of the curve, U.S. 2-year yields slipped to
2.321%, compared with Tuesday's 2.344%.
    Supply was also a factor in Wednesday's market with the
auction of $24 billion in U.S. 10-year notes. The sale was
well-received, analysts said.
    The offering was priced at 2.466%, lower than the expected
yield at the bid deadline. There were $61.3 billion in bids for
a 2.55 bid-to-cover ratio, slightly below the prior 2.59, but
slightly above the 2.50 average.
    
      April 10 Wednesday 4 p.m. New York / 2000 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.3725       2.42      -0.009
 Six-month bills               2.39         2.4528    -0.012
 Two-year note                 99-220/256   2.3232    -0.021
 Three-year note               99-238/256   2.2744    -0.028
 Five-year note                99-74/256    2.277     -0.027
 Seven-year note               99-56/256    2.3722    -0.025
 10-year note                  101-84/256   2.472     -0.027
 30-year bond                  101-252/256  2.9001    -0.009
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         9.25         0.25    
 spread                                               
 U.S. 3-year dollar swap         5.50        -1.00    
 spread                                               
 U.S. 5-year dollar swap         2.75        -0.50    
 spread                                               
 U.S. 10-year dollar swap       -2.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -25.50        -0.75    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan
Oatis and Lisa Shumaker)
  
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