TREASURIES-Yields lower ahead of expected Fed rate cut

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 6/3210YR TNotes DE/d 129-52/256 2/32Price Current NetYield % Change


Three-month bills 1.61 1.6391 -0.005Six-month bills 1.595 1.6348 -0.010Two-year note 99-182/256 1.6475 -0.002Three-year note 99-50/256 1.6547 0.001Five-year note 99-50/256 1.6684 -0.002Seven-year note 99-38/256 1.7548 -0.00310-year note 98-8/256 1.8456 -0.00730-year bond 98-32/256 2.3377 -0.011YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 19.60 -0.1030-year vs 5-year yield 66.80 -0.30


Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 2.00 -0.75


U.S. 3-year dollar swap -2.00 -1.00


U.S. 5-year dollar swap -3.75 -0.50


U.S. 10-year dollar swap -8.75 -0.25


U.S. 30-year dollar swap -38.75 -0.25


(Reporting by Kate Duguid; Editing by Andrea Ricci)