January 29, 2020 / 8:32 PM / a month ago

TREASURIES-Yields fall on virus concerns, Fed leaves rates unchanged

 (Adds Fed, updates prices)
    * Investors concerned about economic impact of virus
    * Fed keeps rates unchanged, raises IOER
    * Fed to continue expanding balance sheet to boost reserves

    By Karen Brettell
    NEW YORK, Jan 29 (Reuters) - U.S. Treasury yields fell on
Wednesday as the death toll from a Chinese virus rose sharply,
and dipped to session lows after the Federal Reserve left
interest rates unchanged and said it would continue expanding
its balance sheet.
    The death toll from a new coronavirus in China rose to 132
on Wednesday with nearly 1,500 new cases, as Japan said it flew
citizens out of Wuhan, the epicenter of the virus.
    Uncertainty over the economic impact of the virus has
resulted in sharp swings in risk sentiment over the past few
    Benchmark 10-year note yields fell five basis
points to 1.59%. They dropped to 1.57% on Tuesday, the lowest
since Oct. 10, before bouncing sharply higher as stock markets
    Yields dipped to session lows after the Fed held interest
rates steady, with officials pointing to continued moderate U.S.
economic growth and a "strong" job market.
    Fed Chairman Jerome Powell also committed to continuing to
expand its balance sheet in order to ensure ample reserves are
in the financial system. 
    He said that $1.5 trillion is the bottom end of the range
and that their targeted reserve level will likely be reached in
the second quarter.
    A scarcity of reserves was blamed as a factor that caused a
spike in overnight borrowing costs in September, leading the Fed
to intervene in the repurchase agreement (repo) market.
    The cost of borrowing overnight in repo edged higher after
the Fed raised the interest it pays banks for excess reserves by
five basis points to 1.60%, a technical adjustment officials say
was needed to keep the federal funds rate around the middle of
the target range.
    "There was a bit of a split about whether they would raise
IOER," said Gennadiy Goldberg, an interest rate strategist at TD
Securities in New York. "The very front-end of the curve
    The overnight repo rate increased to 1.59%, from
    The closely watched yield curve between three-month bills
and 10-year notes very briefly inverted on Tuesday for the first
time since October. It traded at 3 basis points on Wednesday.
    That part of the yield curve inverted last March for the
first time since the financial crisis, signaling that a
recession is likely to follow in one-to-two years.

  January 29 Wednesday 3:02PM New York / 2002 GMT
                               Price        Current   Net Change
                                            Yield %   (bps)
 Three-month bills             1.53         1.5615    -0.011
 Six-month bills               1.535        1.5728    -0.002
 Two-year note                 99-235/256   1.4167    -0.040
 Three-year note               100-78/256   1.3945    -0.051
 Five-year note                99-210/256   1.4124    -0.054
 Seven-year note               99-240/256   1.5094    -0.050
 10-year note                  101-112/256  1.5908    -0.050
 30-year bond                  107-68/256   2.0479    -0.047
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         6.00         0.00    
 U.S. 3-year dollar swap         2.50         0.50    
 U.S. 5-year dollar swap         0.25         0.75    
 U.S. 10-year dollar swap       -4.75         0.75    
 U.S. 30-year dollar swap      -31.50         0.50    


 (Editing by Kirsten Donovan and Nick Zieminski)
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