October 29, 2019 / 2:54 PM / 22 days ago

TREASURIES-Yields lower ahead of expected Fed rate cut

    By Kate Duguid
    NEW YORK, Oct 29 (Reuters) - U.S. Treasury yields on Tuesday
were lower across maturities as the Federal Reserve began its
two-day policy meeting after which it is expected to announce
its third interest-rate cut this year. 
    Though there has been no clear commitment to another
reduction in borrowing costs from Fed policymakers, a failure to
lower rates on Wednesday could risk upending financial markets
that are confident another cut is coming.
    Traders are currently pricing in a 97.3% chance of a cut
tomorrow, up from 49.2% a month ago, according to CME Group's
FedWatch tool. A move Wednesday would be understood as a third
"insurance cut," in which rates are lowered not because the
United States is heading into recession, but in order to extend
ongoing economic expansion, especially amid turmoil in foreign
markets. 
    "I do think that the Fed is in a difficult spot having to
react to what's going on elsewhere in the world much more so
than what's going on in the U.S. economy because our metrics
haven't changed that much," said Mark Heppenstall, chief
investment officer at Penn Mutual Asset Management.
    U.S. economic data has shown that the trade war with China
has slowed growth in the manufacturing sector and has undermined
some business confidence. That weakness, however, has not yet
spread into the labor market. Last month, the U.S. unemployment
rate dropped to a near  50-year low of 3.5%. The government
payrolls report for October will be released on Friday.  
    The benchmark 10-year yield was 0.9 basis point
lower at 1.844%. The two-year yield, a proxy for
market expectations of interest rate policy changes, was flat at
1.648%, with expectations of a rate cut Wednesday fully priced
in by the market. 
    A rate cut could also be justified by the inversion of the
two- and 10-year yield curve earlier this year.
An inversion of the yield curve has preceded every U.S.
recession in the last 50 years.
    "The yield curve inversion is clearly driving a lot of
economic models to forecast higher probabilities of recession
and that I think does, in the Fed's mind at least, justify the
move towards easier policy," said Heppenstall. 
    Some analysts are predicting a hawkish statement to
accompany the cut, which would suggest a pause in Fed rate cuts
after October.
    "I do think that the Fed is going to try to avoid a 90%
probability of the Fed cutting at the next FOMC meeting," said
Heppenstall.
    
    October 29 Tuesday 10:32AM New York / 1432 GMT
                               Price                  
 US T BONDS DEC/d              158-15/32    6/32      
 10YR TNotes DE/d              129-52/256   2/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.61         1.6391    -0.005
 Six-month bills               1.595        1.6348    -0.010
 Two-year note                 99-182/256   1.6475    -0.002
 Three-year note               99-50/256    1.6547    0.001
 Five-year note                99-50/256    1.6684    -0.002
 Seven-year note               99-38/256    1.7548    -0.003
 10-year note                  98-8/256     1.8456    -0.007
 30-year bond                  98-32/256    2.3377    -0.011
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       19.60        -0.10     
 30-year vs 5-year yield       66.80        -0.30     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.00        -0.75    
 spread                                               
 U.S. 3-year dollar swap        -2.00        -1.00    
 spread                                               
 U.S. 5-year dollar swap        -3.75        -0.50    
 spread                                               
 U.S. 10-year dollar swap       -8.75        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -38.75        -0.25    
 spread                                               
 

   
    
    
    







 (Reporting by Kate Duguid; Editing by Andrea Ricci)
  
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