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TREASURIES-U.S. yields fall, in line with Fed rate view

Gertrude Chavez-Dreyfuss

NEW YORK, Feb 5 (Reuters) - U.S. Treasury yields fell on Tuesday, with the 10-year sliding from one-week highs, as investors have started to price in the Federal Reserve's dovish interest rate outlook amid an uncertain global economic outlook. U.S. two-year yields also declined from one-week peaks, while 30-year yields dropped after rising two straight days. "There's a little bit of intra-day volatility, but yields are consolidating around levels that are more consistent with the new position at the Fed which is ... it is effectively on hold at least in the next six months," said John Herrmann, rates strategist at MUFG Securities in New York. The Fed last week struck a cautious tone on the U.S. economy, suggesting it will pause its rate-hike cycle, or even ease monetary policy if the economy warrants it. Many economists believe, however, the Fed could hike one more time this year. Herrmann believes the U.S. economy could decelerate this year as the Trump administration's fiscal initiatives run out. "Last year's strong economy is behind us." Data showing a weaker-than-expected U.S. service sector index of 56.7 affirmed a softer economic outlook, with new orders falling to a one-year low. "The number is coming back down to earth. It's consistent with solid growth, maybe not as solid as before," said Gennadiy Goldberg, senior interest rates strategist at TD Securities in New York. In mid-morning trading, U.S. 10-year note yields fell to 2.698 percent, down from 2.724 late on Monday. U.S. 30-year bond yields were also down at 3.029 percent , from 3.06 percent on Monday. On the short end of the curve, U.S. 2-year yields were down on the day at 2.524 percent, compared with Monday's 2.532 percent US2YTRR. The yield curve flattened a little bit on Tuesday, with the U.S. 10-year and U.S. 2-year note spread at 17.2 basis points, retracing auction-related steepening on Monday. U.S. Treasury prices had weakened on Monday as investors sold government debt to push them lower ahead of an $84 billion auction this week. The U.S. Treasury will sell $38 billion in 3-year notes later on Tuesday. Last month's auction of three year notes picked up a yield higher than market forecast, but overall demand was solid. Analysts at BMO Capital Markets said three-year notes should see steady demand as their yields remained relatively cheap, with heightened supply continuing to highlight buying opportunities.

February 5 Tuesday 10:35AM New York / 1535 GMT

Price Current NetYield % Change

(bps)

Three-month bills 2.375 2.4227 -0.005Six-month bills 2.4375 2.5022 -0.005Two-year note 99-243/256 2.5263 -0.006Three-year note 99-246/256 2.5136 -0.011Five-year note 99-238/256 2.515 -0.019Seven-year note 100-44/256 2.5979 -0.02210-year note 103-160/256 2.7001 -0.02430-year bond 106-196/256 3.0283 -0.032

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 14.50 0.50

spread

U.S. 3-year dollar swap 10.75 0.25

spread

U.S. 5-year dollar swap 8.75 0.25

spread

U.S. 10-year dollar swap 2.25 0.00

spread

U.S. 30-year dollar swap -19.00 0.00

spread

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Richard Leong Editing by Phil Berlowitz)