March 16, 2020 / 8:34 PM / 3 months ago

TREASURIES-Yields fall after Fed action, but above last week's lows

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By Kate Duguid

NEW YORK, March 16 (Reuters) - U.S. government bonds yields fell on Monday after the Federal Reserve announced that it would slash interest rates to near zero, but remained above the all-time lows plumbed last week as investors worried that Treasuries would sell off as they did last week.

The Fed and global central banks acted aggressively on Sunday in a move reminiscent of the sweeping steps taken a decade ago to fight a meltdown of the global financial system. In addition to the rate cut and asset purchases of more than $700 billion, the Fed and other major foreign central banks also cut pricing on their swap lines to make it easier to provide dollars to financial institutions around the world facing stress in credit markets.

The benchmark 10-year Treasury yield, which is reflective of investors’ long-term views of the health of the economy, was last down 20.9 basis points at 0.745%. The subdued move in yields was somewhat surprising given the drastic cut in interest rates.

“The glib answer is that ‘this was already priced in’ – and to some extent the rate cut and eventual return to QE were anticipated,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. But there were unexplained elements, including the size of the asset purchases.

“The counterintuitive sell-off that characterized the last several trading sessions has understandably left investors wary that another round of de-risking in 10s and 30s as investors prefer to hold cash and very front-end securities,” said Lyngen.

The 10-year yield rose 24.7 basis points last week, and the 30-year yield rose 35.2 basis points. Yields move inversely to price.

The two-year yield, which reflects interest-rate policy, continued to trade well above zero despite the Fed cut, last down 11 basis points to 0.380%.

“Even after the FOMC’s 150-basis-point of inter-meeting emergency rate cuts (thus far) in March, two-year yields are still above the top of the target range. Twenty-five basis points appears to be a point of substantial resistance to any additional rally in that tenor,” said Lyngen. The lowest the two-year reached after the financial crisis was 0.143% in September 2011, he noted.

The New York Fed saw light demand for an additional $500 billion in support of overnight lending markets on Monday, even after a spike in the cost of overnight loans indicated that companies were still feeling funding strains. Primary dealers took only $19.40 billion of the loans on offer in the overnight repurchase agreement (repo) operation. (Reporting by Kate Duguid; Editing by Dan Grebler and Steve Orlofsky)

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