September 18, 2019 / 1:44 PM / a month ago

TREASURIES-Yields fall before expected Fed rate cut

    * Fed expected to cut rates by 25 bps
    * Short-term funding pressures remain elevated
    * U.S. increases sanctions on Iran

    By Karen Brettell
    NEW YORK, Sept 18 (Reuters) - U.S. Treasury yields fell on
Wednesday before the Federal Reserve is expected to cut interest
rates and address recent stress in short-term funding markets
that has sent the cost of overnight loans soaring.
    Investors will be focused on forward guidance as Fed
policymakers are deeply divided on the need for further easing
as U.S. economic data improves.
    Fed Chairman Jerome Powell will be expected to explain the
central bank’s position in a news conference after the rate
decision.
    “The interesting aspect for me will be how Chair Powell
characterizes recent strength in the data without sounding
hawkish at the same time, because they do want to keep the door
open for more cuts,” said Subadra Rajappa, head of U.S. rates
strategy at Societe Generale in New York.
    Benchmark 10-year notes             were last up 12/32 in
price to yield 1.772%, down from 1.814% on Tuesday.
    Some analysts also expect the Fed may cut the interest rate
it pays on excess reserves as bank funding costs remained
elevated despite efforts to boost liquidity.
    Cash available to banks for their short-term funding needs
all but dried up this week, and interest rates in U.S. money
markets shot up to as high as 10% for some overnight loans, more
than four times the Fed's rate.             
    The New York Federal Reserve on Wednesday accepted $75.0
billion in bids, the maximum available, from primary dealers at
a repurchase agreement (repo) operation meant to keep the
federal funds rate within its target range of 2.00-2.25%.
            
    The effective, or average interest rate, on what banks
charge each other to borrow reserves overnight rose to 2.30% on
Tuesday, breaking above the top-end of the central bank's target
range for the first time since the global credit crisis more
than a decade ago.             
    Ongoing concerns about last weekend’s attack on Saudi
Arabian crude oil facilities is also providing a safety bid for
U.S. government debt.
    A U.S. official said on Tuesday the United States believes
the attacks originated in southwestern Iran. Iran has denied
involvement in the strikes.              
    U.S. President Donald Trump said on Wednesday he had ordered
Treasury Secretary Steven Mnuchin to "substantially increase
sanctions" imposed on Iran, amid escalating tensions between
Washington and Tehran.
    Concerns about a spike in oil prices harming the economy,
however, have eased since Saudi Arabia’s energy minister said on
Tuesday that the kingdom will restore its lost oil production by
the end of September.             

 (Editing by Nick Zieminski
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