October 29, 2019 / 7:40 PM / 19 days ago

TREASURIES-Yields stall lower ahead of expected Fed rate cut

 (New throughout, adds analyst quotes)
    By Kate Duguid
    NEW YORK, Oct 29 (Reuters) - U.S. Treasury yields were
lower, though moves were generally muted, on Tuesday, the first
of the two-day Federal Reserve policy meeting after which it is
expected to announce its third interest-rate cut this year.
    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. 
    Such 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. 
    "It's calm before the storm. Obviously markets believe the
Fed is going to ease," said Ellis Phifer, market strategist at
Raymond James.
    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.
    "A really bad day would mean no cut. The market is generally
thinking the Fed is not going to be overly dovish after the
fact. I don't think they can be overly hawkish just because
there is no inflation and that's where the hawkishness comes,"
said Phifer.
    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 1.5 basis points
lower at 1.839%. The two-year yield was 0.7 basis
point lower at 1.644%.
    Bond market liquidity is among the topics investors are
expected to hear the Fed address on Wednesday. A cash shortage
that plagued overnight lending markets in the last month is
likely to flare back up heading into year-end, although measures
taken by the Fed to provide liquidity means the worst of the
strains are probably over.
    The Fed began daily repurchase agreements in mid-September,
after the repo rate for overnight loans surged to 10%, the
highest since the financial crisis and far above the Fed’s then
maximum fed funds target rate of 2.25%.
    "I think one of the things they're going to have to address
is the liquidity issue," said Phifer. 
    On Tuesday morning, the Fed's 14-day term repo operation was
oversubscribed with the Fed accepting $45 billion bids of a
submitted $47.9 billion, the cap for which was $45 billion,
suggesting some liquidity stress.      
   
  October 29 Tuesday 3:22PM New York / 1922 GMT
                               Price                  
 US T BONDS DEC/d              158-20/32    11/32     
 10YR TNotes DE/d              129-64/256   3/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.61         1.6391    -0.005
 Six-month bills               1.5975       1.6373    -0.008
 Two-year note                 99-184/256   1.6435    -0.007
 Three-year note               99-52/256    1.652     -0.002
 Five-year note                99-58/256    1.6618    -0.008
 Seven-year note               99-52/256    1.7464    -0.012
 10-year note                  98-24/256    1.8385    -0.015
 30-year bond                  98-48/256    2.3347    -0.014
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       19.30        -0.45     
 30-year vs 5-year yield       67.10        0.05      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         2.25        -0.50    
 spread                                               
 U.S. 3-year dollar swap        -2.00        -1.00    
 spread                                               
 U.S. 5-year dollar swap        -3.50        -0.25    
 spread                                               
 U.S. 10-year dollar swap       -8.75        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -39.25        -0.75    
 spread                                               
 
 (Reporting by Kate Duguid; Editing by Andrea Ricci and Alistair
Bell)
  
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