US yield curve flattens on supply, trade worries

August 7, 2019

NEW YORK (Aug 7) - The spread between U.S. shorter- and longer-dated Treasury yields contracted on Tuesday, as shorter-dated yields rose on $38 billion in three-year debt supply and nagging worries about U.S.-China trade tensions pushed down longer-dated yields.

The modest bounce among most U.S. yields followed four straight sessions of torrid declines as investors rushed into U.S. government debt to shield their money from stocks and other risky assets in response to rising trade friction between China and the United States and bets on more stimulus from global central banks to combat slowing business activity.

“The yield curve is pricing in additional accommodation from the Fed given the confluence of factors including trade,” said Steve Johnson, senior portfolio manager at SVB Asset Management in San Francisco. “It’s a more gloomy scenario.”

Risks from trade conflicts between the United States and other countries led Fed policymakers to lower rates for the first time since 2008 last week.

On Tuesday, St. Louis Fed President James Bullard made the case trade risks may stick around for a long time and said more monetary stimulus “may be desirable.”

Interest rates futures implied traders fully positioned for the Fed to cut rates by at least a quarter-point at its Sept. 17-18 meeting, CME Group’s FedWatch program showed.

Graphic: U.S. Fed's next rate cut? -

Worries about a weakening global economy have stoked demand for Treasuries since last week and supported bids at the $38 billion auction of three-year notes which were sold at the lowest yield in two years.

The Treasury Department will sell $27 billion in 10-year notes on Wednesday and $19 billion in 30-year bonds on Thursday.

Of the $84 billion raised at this week’s refunding, the Treasury intends to use the $57.3 billion raised to repay bondholders and the rest to fund new spending.

Record negative yields in Europe and Japan have also pushed U.S. yields lower as foreign investors seek bonds that offer income.

“Yields in the U.S. in the global picture still look attractive,” Johnson said. “Positive yields have become scarcer.”

Graphic: Euro zone yields -

In late U.S. trading, benchmark 10-year yields were down 0.8 basis point at 1.728%. They touched 1.672% overnight, marking their lowest level since Oct. 5, 2016.

The two-year yield US2YT=RR, which is sensitive to traders’ view on Fed policy, was up 1.8 basis points at 1.601% after hitting 1.529%, which was its lowest level since October 2017.

The two-to-10-year part of the yield curve US2US10=TWEB had narrowed to 11 basis points before finishing at 12.5 basis points, 1 basis point flatter on the day.

Some selling in U.S. bonds emerged earlier Tuesday as investor fears were held in check after China kept its currency in a slightly stronger level a day after it let the yuan weaken to seven to a dollar, a level not seen in a decade.

Late Monday, U.S. Treasury Secretary Steven Mnuchin designated China a currency manipulator, kicking off a formal process of bilateral negotiations between the world’s two largest economies.


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