Wires

TREASURIES-Yields fall as year-end approaches

Karen Brettell

NEW YORK, Dec 27 (Reuters) - U.S. Treasury yields fell on Friday as the debt found support following a selloff that sent yields to one-month highs, with year-end portfolio rebalancing likely helping demand for the bonds. Yields have risen this month as optimism about a trade agreement between the United States and China increased risk appetite. U.S. President Donald Trump said on Tuesday he and Chinese President Xi Jinping will have a ceremony to sign the first phase of the U.S.-China trade deal agreed to this month.

Benchmark 10-year yields have backed up from 1.69% at the beginning of December and are up from a three-year low of 1.43% reached on Sept. 3. But the notes found support at around the 1.95% area and fell to 1.88% on Friday. The December selloff in general has taken many momentum indicators to oversold, analysts at NatWest Markets said in a report on Friday. Now, across (Treasury) benchmarks, those have turned bullishly, after several tests of support the last several weeks. The yield curve between 2-year and 10-year notes also flattened to 26 basis points, after reaching 31 basis points on Dec. 19., which was the steepest since Oct. 2018. Year-end demand for Treasuries to rebalance portfolios likely helped support the bonds on Friday. Trading volumes were thin, however, as many investors and traders were away after Wednesday's Christmas Day holiday. Investors are also focused on whether there will be strains in the overnight funding markets, with banks expected to pare risk taking for year-end. The New York Federal Reserve has been injecting liquidity into the repurchase agreement (repo) market in order to reduce the chance of funding stress, after a flareup in September sent the cost of overnight loans as high as 10%, more than four times the Feds rate at the time. The Fed's repo operations, however, are made only with major dealers, with the banks in turn passing liquidity on to their clients. This could lead some clients struggling to raise funds over the year-end period if banks cut back lending. December 27 Friday 8:54AM New York / 1354 GMT

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(Editing by Steve Orlofsky)