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TREASURIES-U.S. 10-year yield falls below 2% after Fed rate cut outlook

Gertrude Chavez-Dreyfuss

NEW YORK, June 20 (Reuters) - U.S. benchmark 10-year Treasury yields on Thursday dropped below 2% for the first time in more than 2-1/2 years, while other maturities fell to multi-year lows as well, a day after the Federal Reserve flagged interest rate cuts as early as next month. U.S. 30-year yields likewise plunged to their lowest since October 2016, while those on two-year notes slid to their weakest level since mid-November 2017. The Fed on Wednesday signaled interest rate cuts beginning as early as July, saying it is ready to battle growing global and domestic economic risks given rising trade tensions and weak inflation. "The statement indicated the Fed no longer insists on a pause or patience, providing an open ear to doves at upcoming meetings. Also critical ... acknowledgment that inflation pressures are muted," said Jim Vogel, interest rate strategist, at FTN Financial in Memphis, Tennessee. "As difficult as it might be to imagine, rates are also free to fall further," he added. In morning trading, U.S. 10-year note yields fell to 1.995% from 2.027% late on Wednesday. Earlier in the global session, 10-year yields fell to 1.974%. Yields on U.S. 30-year bonds dropped to 2.52%, from 2.54% on Wednesday. They fell as low as 2.48%, the lowest since late October 2016. At the short end of the curve, U.S. 2-year yields slid to 1.696%, the lowest since mid-November 2017, from Wednesday's 1.766%. They were last at 1.716%. U.S. data showing factory activity in the mid-Atlantic region stalling in June, likely a result of recent trade tension between the United States and China, also added to the pressure on yields. The U.S. current account deficit was also wider than expected at anticipated at -$130.4 billion in the first quarter, another black mark for the economy. "Overall, a concerning round of data that confirms the Treasury market rally rather than extending it," said Ian Lyngen, head of U.S. rates strategy, at BMO Capital Markets in New York. Fed funds futures implied traders saw a 100% chance the Fed would cut the target range on short-term interest rates by a quarter point to 2.00%-2.25% in six weeks, CME Group's FedWatch showed. Futures traders also priced a 67% possibility the Fed would lower short-term rates by 75 basis points by year-end.

June 20 Thursday 10:08AM New York / 1408 GMT

Price Current NetYield % Change

(bps)

Three-month bills 2.1 2.1463 -0.036Six-month bills 2 2.054 -0.075Two-year note 100-197/256 1.7203 -0.046Three-year note 100-56/256 1.6745 -0.033Five-year note 101-62/256 1.7366 -0.031Seven-year note 101-176/256 1.8647 -0.02410-year note 103-84/256 2.0026 -0.02430-year bond 107-60/256 2.5286 -0.011

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 1.50 -0.75

spread

U.S. 3-year dollar swap 0.50 -1.25

spread

U.S. 5-year dollar swap -2.75 -1.25

spread

U.S. 10-year dollar swap -7.25 -0.50

spread

U.S. 30-year dollar swap -33.25 -0.25

spread

(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)