* Investors on defense ahead of possible BOJ move
* Drop in U.S. housing starts pare bets on Fed rate hike
* U.S. yield curve flattens for third straight day
By Richard Leong
NEW YORK, Sept 20 U.S. Treasuries yields fell on
Tuesday as traders bought longer-dated bonds on uncertainty over
whether the Bank of Japan may decide on embarking on more
stimulus to help its economy at a two-day policy meeting.
The Federal Reserve, which is also set to meet for two days,
is widely expected to hold its policy rate unchanged in a range
of 0.25 percent to 0.50 percent, and leave the door open for an
interest rate increase by the end of the year.
Traders have been speculating whether the BOJ might lower
its target interest rate deeper into negative territory and
reduce its bond purchases to hold down long-dated yields.
Such a move would steepen the yield curve and alleviate the
profit squeeze on Japanese banks, which have been hurt by
negative short-term rates and bond yields.
"Japan has been the main driver of the bond market," said
Luke Bartholomew, investment manager with Aberdeen Asset
Management in London.
There are doubts whether the BOJ, led by Haruhiko Kuroda,
would act aggressively to combat deflation and weak demand given
the central bank's history of falling short of market
"So few people have a handle on what they might do," said
Gennadiy Goldberg, interest rate strategist at TD Securities in
Skepticism about a bold stimulus plan from the BOJ has
renewed demand for longer-dated U.S. government bonds,
flattening the U.S. yield curve.
The yield gap between five-year and 30-year Treasuries
contracted to 121 basis points after reaching 130 basis points
last Thursday, which was its widest level since June 27,
according to Tradeweb.
After the BOJ announces its policy decision on Wednesday,
traders will await for Fed's release of its policy statement.
Interest rates markets implied traders saw a 16 percent
chance the BOJ would cut its target rate to -0.30 percent from
-0.10 percent, while they priced in a 14 percent probability the
Fed would raise rates, Reuters data showed.
The recent spate of weaker-than-expected U.S. economic data
has reduced expectations the U.S. central bank would raise
interest rates on Wednesday.
On Tuesday, the Commerce Department said housing starts
declined 5.8 percent to a seasonally adjusted annual pace of
1.14 million units, which was slower than what analysts polled
by Reuters had forecast.
Benchmark 10-year Treasury notes were up 8/32 in price for a
yield of 1.670 percent, down 3 basis points from Monday's close.
September 20 Tuesday 11:01AM New York / 1501 GMT
US T BONDS DEC6 166-20/32 0-29/32
10YR TNotes DEC6 130-164/256 0-56/256
Price Current Net
Yield % Change
Three-month bills 0.2975 0.3019 -0.005
Six-month bills 0.495 0.5031 0.000
Two-year note 99-244/256 0.7743 0.000
Three-year note 99-230/256 0.9096 -0.005
Five-year note 99-180/256 1.187 -0.020
Seven-year note 99-76/256 1.4819 -0.026
10-year note 98-116/256 1.6701 -0.028
30-year bond 96-204/256 2.4007 -0.043
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 25.75 0.25
U.S. 3-year dollar swap 18.00 0.25
U.S. 5-year dollar swap 2.50 0.75
U.S. 10-year dollar swap -16.25 1.00
U.S. 30-year dollar swap -55.75 0.50
(Reporting by Richard Leong; Editing by Dan Grebler)