June 3, 2019 / 7:29 PM / 2 months ago

CORRECTED-TREASURIES-U.S. bond market rally carries on after best month since 2011

 (Corrects to read December 2017, not September 2017, in 8th
    * Fed's Bullard says a U.S. rate cut may be 'warranted soon'
    * Futures imply traders see Fed cutting interest rates in
    * ISM U.S. factory index falls to lowest since October 2016
    * U.S. Treasuries produce highest monthly return since Aug

    By Richard Leong
    June 3 (Reuters) - U.S. Treasury yields fell to their lowest
levels since September 2017 on Monday as investors piled more
cash into low-risk debt to seek protection from market
volatility due to growing trade conflicts between the United
States and its trade partners.
    Bond yields tumbled also on expectations of an imminent rate
cut from the Federal Reserve in a bid to stabilize markets and
the economy with manufacturing growth cooling to its weakest
pace in 2-1/2 years in May.
    "It's just that things seem to be getting bad enough every
day that the Fed is going to cut," said Gennadiy Goldberg, U.S.
senior interest rates strategist at TD Securities.
    The near $16-trillion sector produced a total return of
2.35% in May, its strongest monthly showing since August 2011,
according to an index compiled by Bloomberg and Barclays. 
    Long-dated Treasuries generated a stellar 6.7% return, their
juiciest performance since January 2015, as the safe-haven
market rally knocked 10-year yields some 36 basis points lower
last month. In just a month they leapfrogged junk bonds as the
best performing U.S. bond sector so far this year.
    Treasuries were among the top assets in the world in May.
They handily beat stocks but trailed the yen somewhat. 
    At 3 p.m. EDT (1900 GMT), benchmark 10-year Treasury yields
 fell 6.10 basis points to 2.081% after hitting
2.071%, their lowest level since September 2017. Ten-year yields
were set for their biggest two-day fall in just over a year.
    Two-year yields declined 10.20 basis points to
1.842%. They touched 1.838% earlier Monday, which was their
lowest since December 2017.
    Two-year yields were on track for their biggest two-day fall
since October 2008 when they declined by nearly 35 basis points.
    Shorter-dated yields have tumbled on a growing conviction
that the Fed would lower key rates more than once before
year-end to stave off a recession.
    St. Louis Federal Reserve President James Bullard said on
Monday a rate cut may be "warranted soon" due to global trade
risks and weak domestic inflation.
    In what is widely accepted as a recession signal, 10-year
yields have been firmly below three-month note yields
. The inversion in the yield curve has become more
pronounced and steepened at one point on Monday at 27 basis
points, the deepest since 2007.
    Interest rate futures traders are now pricing in a 60%
chance of a rate cut at the Fed’s July 30-31 meeting, up from
18% a week ago, according to the CME Group’s FedWatch program.
    They implied a 82% chance of another rate cut at the Fed's
December meeting, up from 30% a week ago.
    Still it might be too early for the Fed to cut rates this
    "The bond market is a bit over-excited," said TD's Goldberg.
"We have not yet seen trade (risk) has spilled over enough into
the real economy."
    Monday, June 3, at 1500 EDT (1900 GMT):
                               Price        Change    
 US T BONDS SEP9               154-20/32    29/32     
 10YR TNotes SEP9              127-72/256   17/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.29         2.3346    -0.019
 Six-month bills               2.245        2.308     -0.047
 Two-year note                 100-141/256  1.8417    -0.102
 Three-year note               100-238/256  1.7994    -0.096
 Five-year note                100-186/256  1.8469    -0.082
 Seven-year note               101-8/256    1.9663    -0.067
 10-year note                  102-160/256  2.0814    -0.061
 30-year bond                  106-220/256  2.5462    -0.037
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       23.80        3.05      
 30-year vs 5-year yield       69.80        4.40      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         4.00        -0.50    
 U.S. 3-year dollar swap         1.00        -0.75    
 U.S. 5-year dollar swap        -0.50        -0.25    
 U.S. 10-year dollar swap       -4.50         0.50    
 U.S. 30-year dollar swap      -28.25        -0.25    

 (Reporting by Sujata Rao and Virginia Furness in LONDON 
Editing by Nick Zieminski and Chizu Nomiyama)
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