May 8, 2020 / 4:24 PM / 17 days ago

CORRECTED-TREASURIES-Two-year yields hit record lows, fed fund futures imply negative rates

 (Shortens quote in ninth paragraph to make clearer)
    By Karen Brettell
    NEW YORK, May 8 (Reuters) - Two-year Treasury yields hit
record lows on Friday and fed fund futures implied the Federal
Reserve could cut rates into negative territory this year,
though analysts said the move was likely technical as investors
betting on higher rates were squeezed out of their positions.
    The move comes after data on Friday showing the U.S. economy
lost a staggering 20.5 million jobs in April, the steepest
plunge in payrolls since the Great Depression and the starkest
sign yet of how the novel coronavirus pandemic is battering the
world's biggest economy.
    Investors are evaluating how long it will take for the
economy to recover, and how much more fiscal and monetary
stimulus will be needed to spur growth.
    The Fed in March cut rates to zero and has launched numerous
lending programs meant to blunt the economic impact of business
shutdowns.
    But U.S. central bank officials including Chairman Jerome
Powell have talked down the likelihood of adopting a negative
rate policy.
    “The Fed has consistently said they’re not interested in
negative rates,” said Robert Tipp, chief investment strategist
at PGIM Fixed Income.
    Optimism that the economy is closer to reopening has boosted
risk assets this week and led some investors to bet that yields
could rise from historic lows.
    The sharp price rally in short-dated debt, however, is
likely due to these investors having to cover their positions as
the market moved against them.
    “What can happen is when rates get lower and lower, and the
Fed is flooding the markets with liquidity, is you can get
people that are forced to take those trades off," Tipp said.
    Two-year yields dropped to as low as 0.105%,
before rising back to 0.1191%. 
    The yields hit their lows after White House economic adviser
Larry Kudlow said the White House will not consider any further
stimulus legislation this month as it watches the economic
impact from reopening U.S. states.
    Fed fund futures showed the U.S. central bank could
be forced to cut rates into negative territory by December.
    The Fed is reluctant to adopt negative rates due to concerns
such a move may not be effective in stimulating growth, and
because it may disrupt the banking system and the $4.7 trillion
U.S. money market.
    “We have a money market fund industry whose business model
would come under severe strain if rates were negative,” UBS
strategists led by Michael Cloherty said in a report.
    Benchmark 10-year note yields were last 0.653%,
after falling to 0.607% earlier on Friday. The yields have held
in a tight band between 0.543% and 0.785% for the past month.
    

    
  May 8 Friday 11:50AM New York / 1550 GMT
                               Price                  
 US T BONDS JUN0               180-7/32     -0-29/32  
 10YR TNotes JUN0              139-56/256   -0-20/25  
                                            6         
                               Price        Current   Net Change
                                            Yield %   (bps)
 Three-month bills             0.11         0.1119    0.006
 Six-month bills               0.14         0.1424    0.002
 Two-year note                 100-3/256    0.1191    -0.010
 Three-year note               100-58/256   0.1724    -0.011
 Five-year note                100-106/256  0.291     -0.003
 Seven-year note               100-8/256    0.4954    0.009
 10-year note                  108          0.6529    0.022
 30-year bond                  115-132/256  1.364     0.043
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         9.50        -1.50    
 spread                                               
 U.S. 3-year dollar swap         4.00        -1.50    
 spread                                               
 U.S. 5-year dollar swap         1.25        -1.50    
 spread                                               
 U.S. 10-year dollar swap       -4.50        -0.50    
 spread                                               
 U.S. 30-year dollar swap      -50.25        -0.25    
 spread                                               
 


    
 (Editing by Chris Reese)
  
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