June 25, 2019 / 6:44 PM / 5 months ago

TREASURIES-Yields fall as trade war concerns offset Bullard comments

 (Adds comments by Powell and Bullard, auction result, updates
    * Fed's Bullard sees no need for 50 bps cut in July
    * U.S. official says U.S.-China trade war could last years
    * Treasury sells $40 bln two-year notes to solid demand

    By Karen Brettell
    NEW YORK, June 25 (Reuters) - U.S. benchmark Treasury yields
fluctuated around the key 2% level on Tuesday as investors
weighed the prospect of an ongoing U.S.-China trade war against
the likelihood that the Federal Reserve may be less dovish than
traders expect. 
    St. Louis Federal Reserve Bank President James Bullard said
on Tuesday he did not view a 50 basis point cut at the U.S.
central bank's July meeting as warranted, rowing back
expectations of how low rates may go in the near term.
    "I don't think the situation really calls for that, but I
would be willing to go 25 (basis points)," he said.             
    Bullard's comments came just before a speech by Fed Chairman
Jerome Powell, who reiterated that the central bank still saw
U.S. growth prospects as strong, with unemployment low and
inflation near the Fed's 2% annual target.             
    "Bullard's comments are the most telling because he is the
most dovish member," said Mary Ann Hurley, vice president in
fixed income trading at D.A. Davidson in Seattle. "The fact that
he outright says that the conditions do not warrant it at this
point, I think is very, very significant."
    Interest rate futures traders are now pricing in a 33%
chance of a 50 basis point cut at the Fed's July meeting, down
from 38% earlier on Tuesday, while a cut of at least 25 basis
points is seen as certain, according to the CME Group's FedWatch
    Slowing global growth has sent yields to multi-year lows and
prompted global central banks to adopt a more cautious tone on
the economy.
    Benchmark 10-year yields             are holding just above
the 1.974% level reached on Thursday, which was the lowest since
November 2016.
    Investors are next focused on whether U.S. President Donald
Trump and Chinese President Xi Jinping can de-escalate the trade
war between the two countries when they meet at the G20 summit
in Japan.             
    The goal of a meeting between the two leaders will be to
restart trade talks and there is a pretty good chance that will
happen, though these talks could go on for months or years, a
senior administration official said on Tuesday.             
    The Treasury Department sold $40 billion in two-year notes
on Tuesday to solid demand, the first sale of $113 billion in
coupon-bearing supply this week.
    The notes sold with an above-average bid-to-cover ratio of
2.58 times.             
    The government will also sell $41 billion in five-year notes
on Wednesday and $32 billion in seven-year notes on Thursday.

 (Editing by Susan Thomas; Editing by Richard Chang)
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