March 16, 2020 / 4:55 PM / 16 days ago

TREASURIES-Yields lower but moves subdued after Fed cuts rates

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By Kate Duguid

NEW YORK, March 16 (Reuters) - U.S. government bonds yields fell on Monday morning after the Federal Reserve announced that it would slash interest rates to near zero, but the moves were modest as investors worried that Treasuries would sell off as they did last week.

The Fed and global central banks acted aggressively on Sunday in a move reminiscent of the sweeping steps taken just over a decade ago to fight a meltdown of the global financial system. In addition to the rate cut and asset purchases of more than $700 billion, the Fed and other major foreign central banks also cut pricing on their swap lines to make it easier to provide dollars to financial institutions around the world facing stress in credit markets.

The benchmark 10-year Treasury yield, which is reflective of investors’ long-term views of the health of the economy, was last down 13 basis points to 0.823% in mid-morning trade. The two-year yield, which reflects interest-rate policy, fell 12.6 basis points to 0.366%.

The subdued move in yields was somewhat surprising given the drastic cut in interest rates. Although the two-year reflects interest rates, it continued to trade well above zero.

“The glib answer is that ‘this was already priced in’ – and to some extent the rate cut and eventual return to QE were anticipated,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. But there were unexplained elements including the size of the asset purchases.

“The counterintuitive sell-off that characterized the last several trading sessions has understandably left investors wary that another round of de-risking in 10s and 30s as investors prefer to hold cash and very front-end securities,” said Lyngen.

The 10-year yield rose 24.7 basis points last week, and the 30-year yield rose 35.2 basis points. Yields move inversely to price.

The cost of borrowing in the overnight repurchase agreement (repo) market jumped as high as 2% on Monday in volatile trading, before the New York Fed said it would offer a second overnight repo operation of up to $500 billion at 1:30 p.m. ET on Monday. The cost of the overnight repo loans fell back to 1% after the Fed statement.

The New York Fed saw strong take-up of the overnight loans early Monday with banks borrowing $129.6 billion of the $175 billion possible. However, only $18.45 billion of the possible $500 billion 28-day loans on offer were taken.

The yield on the 30-year bond was down 13.9 basis points to 1.439%. (Reporting by Kate Duguid; Editing by Dan Grebler and Steve Orlofsky)

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